Kula Gold
Annual Report 2012

Plain-text annual report

2012 AnnuAl report Advancing towards production a Annual Report 2012Kula Gold’s significant achievement during 2012 was the completion of the Feasibility Study and its subsequent lodgement with the MRA. Kauri village aid post. Altered volcanic rocks from the Bomagai alteration zone. Kula Gold Limited ACN 126 741 259 Chairman’s letter Kula Gold’s significant achievement during 2012 was to complete the Feasibility Study for the Woodlark Island Gold Project, resulting in the Mining Lease Application in October 2012. A 26% increase in the Measured and Indicated Resources in the Kulumadau area was the catalyst for delivering a viable Feasibility Study. David Frecker This increase was the result of limited but targeted infill drilling at Kulumadau East in the second quarter of the year that confirmed the continuity of high grade gold mineralisation. The Feasibility Study showed that the Project is viable and financially robust. As presented in the Feasibility Study, it will have a nine year mine life with recovery of 674,000 ounces over the first six years through a 1.8 Mtpa plant and total production of 813,000 ounces. During years 1 to 6, the cash operating costs are estimated to be US$730/oz. The Feasibility Study, together with the application for the Mining Lease and the Proposal for Development, were submitted to the PNG Mineral Resources Authority on 30 October 2012. The Environmental Impact Statement was submitted to the Department of Environment and Conservation on 17 January 2013. The Government is well-advanced with its review of these documents, which is expected to lead to grant of the Mining Lease for the Project. As with all mineral exploration projects in Papua New Guinea, the PNG Government (formally, the State) has the right to purchase an equity participation in the Woodlark Island Gold Project – up to 30% for a price equal to the corresponding percentage of the accumulated exploration expenditure on the Project. In March 2012, the Company was informed by the Minister for Mining that the State owned company, Petromin PNG Holdings Limited, had been nominated as the State’s nominee to take up an equity participation in the Project if the State elects to exercise its option to do so. The Minister stated in a letter to the Company at the time that this nomination would allow Petromin to plan its participation and to assist in obtaining the necessary licensing approvals. Petromin has reviewed the Feasibility Study and expressed a keen interest in the Project. The Company is hopeful that an early decision will be made on whether Petromin will buy into the Project and at what percentage level. If it does, the terms of the State’s option are that its nominee should thereafter contribute to further exploration and development on a pro rata basis. Throughout the year, your Company has maintained good relations with the Government in Papua New Guinea, at both national and provincial level. Following the PNG elections in July, the new National Government headed by the Prime Minister, Mr Peter O’Neill, has enunciated its continuing support for resource development within the country, and our CEO has been in regular dialogue with the National Government and the new Governor of the Milne Bay Province about the Company’s Project. The Company has also continued to maintain excellent relations with the landowners and local communities on Woodlark Island. The Compensation Agreement with landowners was signed in March 2012 and the Relocation Agreement with the landowners in and around Kulumadau was signed in March 2012. These two agreements provide the framework for the Company’s dealings with the local landowners as the Project moves towards development, and the Company has achieved a major milestone with these agreements in place at this stage. In November 2012, the Company undertook a capital raising through a share placement and share purchase plan which raised in total $5.2 million (net of transaction costs). Many existing shareholders, both large and small, supported the Company by subscribing for additional shares in this capital raising, and the directors thank them for their support. Economic and market conditions, and fluctuations in the gold price, make this a difficult time for many gold companies. Your Company is affected by these factors along with many other companies in the gold sector. The directors are mindful that recent share market prices do not reflect the underlying value of the Woodlark Island Gold Project and are looking at ways to deal with this. Notwithstanding the difficult equity market circumstances, the Company’s employees, both in Australia and in Papua New Guinea, have continued to serve the Company with dedication and the directors thank them for their ongoing commitment and continuing efforts. DaviD Frecker Chairman 1 Annual Report 2012Chief Executive Officer’s report The year ending 31 December 2012 has been another year of significant progress for Kula Gold on the path towards the development of an operating gold mine on Woodlark Island, Milne Bay Province, Papua New Guinea (PNG). Lee Spencer ❋ Lodgement of a Mining Lease Application with the Mineral Resources Authority in Port Moresby ❋ Engaging a mining engineer in the role of Chief Operating Officer as a key addition to the management team. Corporate The Company completed a capital raising towards the end of 2012 which resulted in $5.2 million (net of transaction costs) being raised for operational funding in 2013. The Company also was engaged in building its operations team during the year. A key appointment to reflect the current development status of the Company was the addition of Stuart Pether as Chief Operating Officer to the management team. resources Global JORC resources for Woodlark Island were updated in 2012, after drilling at Kulumadau East in mid 2012. The current project resources are 45.1 million tonnes at 1.5g/t Au for 2.12 million ounces at a 0.5g/t Au lower cutoff). Refer to Table 1. 100% owner of an advanced stage Gold project on Woodlark Island in the Milne Bay province of papua new Guinea 4502 km tenements covered 2,120,000 oz gold at 0.5g/t Au lower cut off The transition from explorer to developer is accelerating with the following key milestones having been completed during the year: ❋ Discovery of further mineralisation at Kulumadau East under cover and adjacent to known resources. The current project resources are 45.1 million tonnes at 1.5g/t Au for 2.12 million ounces at a 0.5g/t Au lower cutoff. The resources are located in three areas namely; Kulumadau, Busai (including Munasi) and Boniavat/ Woodlark King (including Watou). ❋ Current Project Reserves are 10.991 million tonnes at 2.2g/t Au for 766,000 ounces in the Proved and Probable categories. This also represented a 26% increase to IPO Reserves of 584,000 ounces. ❋ Completion of the Feasibility Study for the Project demonstrating that the project was viable on a pre-tax NPV of USD$237 million, pre-tax IRR of 34% and payback of 2.6 years based on a USD$1600/ounce gold price. ❋ Completion and submission of the Environmental Impact Statement to the Department of the Environment and Conservation in Port Moresby in conjunction with the Company’s environmental consultants Coffey Environments, to obtain an Environmental Permit for the project. 2 Kula Gold Limited ACN 126 741 2591 2 1 Location of the Woodlark Island Gold Project and location of exploration tenements. 2 New bridge, Sinkwarai River to allow safer crossing for all users. 3 Muyuw village children. 3 table 1: Global resources for the Woodlark Island Gold project Deposit Category Kulumadau Measured Kulumadau Kulumadau Indicated Inferred Kulumadau Totals Busai Busai Busai Busai Boniavat Boniavat Boniavat All All All totals* Measured Indicated Inferred Total Indicated Inferred Total Measured Indicated Inferred resource (Mt) Grade (uncut) (g/t Au) Grade (Cut) (g/t Au) 5.0 4.4 8.6 18.0 3.9 10.4 8.8 23.1 3.0 1.0 4.0 8.9 17.8 18.5 45.1 1.84 1.95 1.5 1.7 1.60 1.5 1.3 1.4 1.3 1.9 1.4 1.73 1.6 1.4 1.5 1.78 1.75 1.4 1.6 1.54 1.4 1.3 1.4 1.2 1.8 1.4 1.67 1.5 1.4 1.5 Au (uncut) (oz) 295,000 275,000 410,000 980,000 200,000 490,000 370,000 Au (Cut) (oz) 285,000 245,000 375,000 910,000 190,000 480,000 370,000 1,060,000 1,040,000 125,000 60,000 185,000 495,000 890,000 835,000 115,000 60,000 175,000 480,000 840,000 800,000 2,230,000 2,120,000 * Totals may appear incorrect due to rounding Note 1: The Busai Indicated Resource includes and 0.4Mt @ 1.4/t Au for 20,000oz from overlying Kiriwina mineralisation. Note 2: The Busai Inferred Resource includes and 0.4Mt @ 1.2/t Au for 15,000oz from overlying Kiriwina mineralisation and 3.9Mt @ 0.9g/t Au for 110,000oz from Munasi (2km southeast of Busai). Note 3: The Boniavat Inferred Resource includes 0.3Mt @ 3.0g/t for 30,000oz Au from Watou (1.5km south of Woodlark King). 3 Annual Report 2012Chief Executive Officer’s report (continued) Exploration drilling during 2012 was reduced from 2011 levels to enable all the engineering elements that require drilling within the Feasibility Study to be completed. Nonetheless, infill drilling at Kulumadau East was successful in converting Inferred Resources to higher categories which enabled a portion of this zone of mineralisation to be included in Reserves. The area containing the Kulumadau Resource has not been fully closed off due to the recent recognition that the mineralisation is circular in nature and has been subsequently modified by post- mineralisation faulting (noting the majority of the deposit is under young sedimentary cover) and reduction of exploration drilling activities to enable the Feasibility Study to be completed. The following targets have been recognized at Kulumadau: ❋ Mineralisation in the Inferred Category outside the optimised pits particularly in the eastern side of Kulumadau West. ❋ The area between Kulumadau East and West more particularly associated with the flanks of the Kulumadau intrusive breccia. ❋ Potential mineralisation around the postulated southern margin of the circular diatreme structure. Significant potential exists to convert current out of pit Inferred Resources at Kulumadau by infill drilling to Measured and Indicated category. Currently 4Mt @ 2.9g/t Au for 397,000 ounces lie in the Inferred category outside the current Feasibility Study pit margins. Inferred Resources are represented by blue areas and Measured and Indicated Resources are in red in Figure 1 below. The Feasibility Study proposed pit collars are shown by thin red lines. Total drilling for the year amounted to 2,688 metres of reverse circulation (RC) and 1,017 metres of diamond drilling with details in Table 2 . This compared with 43,042 metres of reverse circulation (RC) and 8,096 metres of diamond drilling in the previous year. Further drilling is planned aimed at the targets outlined above. table 2: Drilling Summary during 2012 rC Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec exploration resource - - - - - - - - - - - - - - - 1,540 1,417 2,090 98 - - - - - FIGure 1: Feasibility Study Defined Pits and Current Resource Categories at Kulumadau 4 Kula Gold Limited ACN 126 741 259Feasibility Study During the year, the Feasibility Study was completed by Arccon Mining Services in conjunction with the Company and its various consultants and after inclusion of Measured and Indicated Resources at Kulumadau East. The study was subsequently submitted to the PNG Mineral Resources Authority on 30 October 2012. The Feasibility Study envisages mining ore from three open pits with ore being hauled a maximum of five kilometres over relatively flat topography to a centrally located processing plant, refer Figure 2. Ore processing utilising a conventional gravity/CIL circuit will commence at 1.8 Mtpa (million tonnes per annum) with an initial mine life of at least nine years. Initial ore will be sourced from near surface, higher grade ore at Kulumadau and Busai with subsequent ore being sourced from phased open cut mining of Kulumadau West, Kulumadau East and Busai deposits followed by the relatively smaller Woodlark King deposit. Development In PNG, for a Mining Lease to be granted, the Company is required to submit a Feasibility Study and Development Proposal together with an Environmental Impact Statement in conjunction with various social agreements with the local landholders, local level government, provincial government and the PNG national government. These key milestones were completed during the year including the Compensation Agreement signed in April 2012 and the Relocation Agreement with the landowners in and around Kulumadau was signed in March 2012. These two agreements provide the framework for the Company’s dealings with the local landowners as the Project moves towards development. FIGure 2: Conceptual project layout The JORC compliant, Ore Reserves of 766,000 ounces were estimated by independent engineers, L.J. Putland & Associates, on the Kulumadau, Busai and Woodlark King deposits. Refer Table 3. table 3: project ore reserves Deposit proved probable total tonnes Grade ounces tonnes Grade ounces tonnes Grade ounces Busai 3,283,000 Kulumadau 3,144,000 Woodlark King Kulumadau East – – 2.2 2.2 – – 233,000 2,811,000 223,000 751,000 – – 704,000 330,000 Total 6,427,000 2.2 456,000 4,596,000 1.9 2.4 1.7 3.7 2.1 175,000 6,094,000 59,000 3,863,000 39,000 37,000 704,000 330,000 310,000 10,991,000 2.1 2.3 1.7 3.7 2.2 408,000 282,000 39,000 37,000 766,000 Note: Totals may appear incorrect due to rounding. 5 Annual Report 2012Chief Executive Officer’s report (continued) Open Pit Optimisations were prepared for each of the deposits using a gold price of US$1200 per ounce and a processing throughput of 1.8 million tonnes per annum. Pit slope angles for the various open pits were based on specific drilling and analysis by geotechnical and hydrological experts. Metallurgical recoveries were based on the results from specific metallurgical testwork. Within the open pit designs there are additional Inferred Resources which cannot be classified as Reserves under JORC guidelines. The mine plan assumes the treatment of in-pit Inferred Resources and a low grade stockpile which is below cut-off grade but above 0.5g/t Au. In the final years of the project, it is assumed that the project will be operated in a manner that makes the low grade stockpile economic to process. 6 FIGure 3: Kulumadau pit Designs Ore Block Model and Section Kula Gold Limited ACN 126 741 259FIGure 4: Busai pit Designs Ore Block Model and Section 7 Annual Report 2012Chief Executive Officer’s report (continued) This mining schedule provides a head feed grade of 2.14g/t over the first six years of production. Key outputs are shown in Table 4 below with annual production and head feed grade over life of mine shown in Figure 5. table 4: Key outputs Average Plant Throughput Head Feed Grade Gold Recovery Strip Ratio: Waste/Ore units Mtpa g/t Au % Year 1 Year 1 to 6 Life of Mine 9 Years 1.7 2.37 92 9.5 1.8 2.14 90 8.8 1.9 1.70 88 9.1 Total Gold Production ounces 118,000 674,000 813,000 Mining Cost *1 US$/t mined 1.96 Processing Cost US$/t processed 23.97 Admin & General Cost *2 US$/t processed C1Cash Costs *3 uS$/oz 6.91 745 1.84 21.92 6.62 730 1.92 21.08 5.58 812 *1 assuming owner operated fleet *2 including owner’s costs *3 deferred waste after pre-strip is included in cash cost Y1 FIGure 5: proposed Annual production and Head Feed Grade The final years of gold production are scheduled from a low grade stockpile. Further infill drilling and regional exploration success will allow the scheduling of this stockpile to be deferred and replaced with processing of higher grade ore. Comprehensive metallurgical testwork on the deposits was supervised by R.W. Nice and Associates and undertaken at Metcon Laboratories, Orway Mineral Consultants and Ammtec with final plant design made in conjunction with Arccon. Metallurgical recoveries for years 1 to 6 average 90%. The ore required a medium grind of 106 microns. The ore types also demonstrated a reasonably high proportion of free gold reflected in core logs and by elevated gravity recovered gold at Kulumadau and Busai. Overall gravity recovered gold amounted to 37% of total gold recovered. The Feasibility Study established that a conventional comminution circuit followed by a standard gravity and CIL process flowsheet then followed by carbon elution and electrowinning to produce gold dore bars, would yield overall average gold recoveries as above. Tailings disposal will be by standard tailings dam or deep sea tailings placement depending on the requirements of the PNG Government. For the Feasibility Study detailed cost estimates were prepared for both tailings disposal alternatives. 8 Kula Gold Limited ACN 126 741 259The establishment costs for the project amount to US$160 million based on written quotes from equipment suppliers, service providers and consumables in the Asia-Pacific region. These estimates were compiled by Arccon based on new equipment and include variable contingencies, refer Table 5. table 5: establishment Capital Costs Cost Centre Processing Plant including Tailings Infrastructure Spares and First Fill Owners Costs including Relocation Pre Strip Fixed Price Turnkey EPC establishment Capital Cost Mining Fleet*1 Deferred Life of Mine Capital Deferred Waste during Mine Ramp Up*2 *1 assuming owner operated fleet *2 deferred waste after pre-strip is included in cash cost Y1 uS$M 92 20 5 20 8 15 160 36 16 11 FIGure 6: proposed Mill Site layout 9 Annual Report 2012Chief Executive Officer’s report (continued) Operating costs, Table 6, were based on written quotes for fuel supply (the largest component of operating costs), services and consumables. Labour costs were estimated from industry survey and current PNG data. PNG Government royalties are 2.25% of the value of the gold produced. The financial model of the Woodlark Island Gold Project Feasibility Study indicates that at a gold price of US$1600 per ounce the pre-tax NPV is US$237 million and IRR is 34% at a discount rate of 7%. After taking into account the PNG corporate tax rate of 30% including accumulated tax deductions, the post-tax NPV is US$194 million and IRR is 31% at a discount rate of 7% and a gold price of US$1600 per ounce, refer Table 7 below. table 6: operating Costs Costs Mining*1 Processing Administration & General Owners Costs Sub Total Refining Costs Silver Credits c1cash costs Royalties*2 Total Operating costs*3 Y1-6 uS$M loM uS$M uS$/t Milled Y1-6 uS$/oz recovered Y1-6 uS$/oz recovered loM Y1-9 183 239 70 2 212 356 92 3 494 663 2 (4) 492 27 519 3 (5) 661 32 693 16.74 21.92 6.44 0.18 45.28 0.21 (0.37) 45.12 2.43 47.55 271 355 104 3 733 3 (6) 730 40 770 261 438 113 3 815 3 (6) 812 39 851 *1 owner operated fleet cash cost – excludes depreciation *2 gold price US$1600/oz *3 net of silver credits table 7: Financial Summary Gold price uS$1400/ounce Gold price uS$1600/ounce Gold price uS$1800/ounce US$1,139,000,000 US$1,301,000,000 US$1,464,000,000 US$133,000,000 US$237,000,000 US$340,000,000 23% 34% 43% US$110,000,000 US$194,000,000 US$274,000,000 22% 31% 39% 3.2 years 2.6 years 2.1 years LOM Project Gold Revenue Project pre-tax NPV @ 7% Project pre-tax IRR Project post-tax NPV @ 7% Project post-tax IRR Payback from Production Start 10 Kula Gold Limited ACN 126 741 259 environmental Impact Statement The Environmental Impact Statement was completed by Coffey Environments with the aid of a large number of independent consultants and was submitted to the Department of Environment and Conservation on 17 January 2013. The Environmental Impact Statement found that a number of direct benefit streams will be generated by the project that will result in increased provincial wealth (e.g., from royalties, spin-offs and wages) and national wealth (e.g., from royalties and taxes. Substantial economic multipliers for Milne Bay Province are likely to be associated with the project, as will economic linkages within PNG’s economic sectors that drive local, provincial and national economic growth. The project is expected to have mainly positive impacts for Woodlark Islanders, given its scale and commitment to employing local staff. The project will provide training and skills, contribute wages to the local economy, provide improved health services, expand education opportunities, assist with local business development (for businesses that serve the mine), and other community investments made in consultation with the local people. Mining lease Application The Feasibility Study, together with an Application for the Mining Lease (MLA 508) and the Proposal for Development, were submitted to the PNG Mineral Resources Authority on 30 October 2012. The process for Mining Lease grant was initiated in early January 2013 with the successful onsite completion of the wardens hearing. Warden’s hearing held on 17 January 2013. project Financing In March 2012, the Company was informed by the Minister for Mining that the State owned company, Petromin PNG Holdings Limited, had been nominated as the State’s nominee to take up to 30% equity participation in the Project if the State elects to exercise its option. Petromin has signed a Confidentiality Agreement and has subsequently reviewed the Feasibility Study. Petromin has expressed an interest in the Project and is currently completing its internal reviews prior to making a decision. Discussions on financing were progressed towards the end of 2012 with several banks expressing interest to provide project financing. Concurrently with project financing and permitting, the company is also reviewing sections in the Feasibility Study where there is potential to reduce capital and operating costs. Health, Safety and the Community Kula Gold Limited operates in Papua New Guinea through its 100% owned subsidiary Woodlark Mining Limited. Together they employ a total of 80 employees with the majority being local Muyuw people indigenous to Woodlark Island. Safety and health has been the number one focus for the Company operating in the challenging tropical environment on the island. The safety record for the period again has been excellent. The Company rigorously conducts safety inductions, weekly tool box meetings, incident reporting and analysis and has a safety officer in place to train local Woodlark Islanders in safety procedures and regulations. The company manages community and social issues through its community relations department on the island and has maintained excellent relations. 11 Annual Report 2012CEO report (continued) 2 1 Compensation agreement signing by clan leaders on 20 April 2012. 2 John Watkins (CFO) at the newly established seedling nursery. ❋ training: The Company has instituted training programs for equipment operators, surveyors, drillers and other employees during the course of the year. The training program has proved very successful. ❋ education: The Company has been instrumental in providing basic educational hardware to various schools throughout the Island environment The Company is committed to developing the project in an environmentally responsible manner. Extensive impacts have already been made on the environment by pre-World War 1 mining operations, World War 2 infrastructure and by extensive logging operations in the 20th Century. Nonetheless, the company has a policy of rehabilitating areas that have undergone exploration in the past and has made significant progress during the year including the establishment of a seedling nursery. With thanks As a concluding remark I would like to thank the Woodlark Island communities and all levels of local, provincial and national government in Papua New Guinea for the support they have given the Company and the project again during this year. Special thanks go to our enthusiastic team of employees and consultants both in Australia and PNG through whose persistence and efforts the Company has achieved the key milestones of a viable Feasibility Study , Environmental Impact Statement and lodgment of a Mining Lease Application. I again look forward to the continued support of all stakeholders as the project progresses towards development. Lee k Spencer Chief Executive Officer Kula Gold Limited 1 Key areas of concern to the local communities include: ❋ Health: Woodlark Island has endemic malaria with few government medical facilities. In the past, the company aided Rotary Against Malaria to distribute nets across the whole of the island. The Company has previously established a clinic under the supervision of a health extension officer, the services of which are available to Company employees, their extended families and emergency cases. The Company’s clinic regularly treats 700 local people a month and during the past year and again has undertaken several emergency evacuations to the base hospital at Alotau and has been instrumental in saving lives. ❋ employment: In conjunction with the local communities an Employee Consultative Committee has been in operation to advise the Company on work related issues including but not limited to ensuring a fair and reasonable spread of employment opportunities across the whole of the island. 12 Kula Gold Limited ACN 126 741 2592012 FInAnCIAl report kula Gold Limited ACN 126 741 259 13 Annual Report 2012Corporate directory Directors David Frecker Chairman Lee Spencer Managing director and chief executive officer John Watkins Executive director and chief financial officer Louis rozman Non-executive director Mark Stowell Non-executive director Company secretary Leanne Ralph registered office Suite 2, Level 15, 1 York Street Sydney, NSW 2000 T: + 61 2 9262 5651 F: + 61 2 9262 5680 e: info@kulagold.com.au W: www.kulagold.com.au Auditor PricewaterhouseCoopers Australia Darling Park Tower 2 201 Sussex Street Sydney, NSW 2000 T: +61 2 8266 0000 Share registry Link Market Services Limited Level 12, 680 George Street Sydney, NSW 2000 T: 1300 554 474 or +61 2 8280 7111 Stock exchange listing Australian Securities Exchange ASX code: KGD 14 Kula Gold Limited ACN 126 741 259FInAnCIAl report CONTENTS Directors’ report Remuneration report Auditor’s independence declaration Corporate governance statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report to the members of Kula Gold Limited Shareholder information Interest in mining tenements 16 21 28 29 36 37 38 39 40 76 77 79 81 Annual Report 2012 15 Directors’ report Your directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of Kula Gold Limited (referred to hereafter as Kula Gold or the Company) and the entities it controlled at the end of, or during, the year ended 31 December 2012. Directors The following persons were directors of Kula Gold Limited during the whole of the financial year (unless noted otherwise) and up to the date of this report: David Frecker Lee Spencer John Watkins Louis Rozman Mark Stowell principal activities The principal activity of the Group is the development of the Woodlark Island gold project located on Woodlark Island in Papua New Guinea. Dividends No dividends have been paid or declared during the year (2011: $nil). result of operations The net loss from operations of the consolidated entity was $29,234,000 (2011: loss of $1,354,000). review of operations For the year ended 31 December 2012 the Group has been focused upon finalising the feasibility study and the Environmental Impact Statement on its core assets located on Woodlark Island, Milne Bay Province, Papua New Guinea. The feasibility study was formally completed at the end of September 2012 and concluded that a viable gold project exists on Woodlark Island. The Group, supported by a group of skilled external consultants, completed the feasibility study to a high standard over the previous two years. Key features of the feasibility study are as follows: ❋ Increased proved and probable ore reserves of 10.99 Mt g/t Au for 766,000 ounces. ❋ Recovery of 674,000 ounces over the first six years through a 1.8 Mtpa plant. ❋ Estimated cash operating costs of US$730/ounce for years 1 to 6. ❋ Establishment capital cost of US$160 million. ❋ Pre-tax Internal Rate of Return (IRR) of 34%; and, ❋ Capital payback period of 2.6 years from production commencement (at a gold price of US$1,600/ounce). On the 30 October 2012, the Group announced it had formally lodged with the Papua New Guinea Mineral Resources Authority (MRA), the Mining Lease Application (MLA) in conjunction with the feasibility study and development proposal. The Group has on going regular contact with the Papua New Guinea officials and it is anticipated this will continue into the future. Further the people of Woodlark Island have been actively informed about the project through an extensive stakeholder engagement program. This program will continue through the various phases of the project. 16 Kula Gold Limited ACN 126 741 259Directors’ report (continued) review of operations (continued) During November 2012 the Company raised proceeds of $5,154,000 (net of transaction costs) from existing shareholders in a share placement to fund ongoing working capital requirements. Whilst the group is waiting for approval of its MLA, it is actively pursuing financing options. The following financing alternatives are currently being considered are: ❋ Approaches have been made to a number of banks interested in providing debt financing facilities. The Group is currently reviewing a number of indicative term sheets that have been submitted by the banks. Significant matters relating to the ongoing viability of operations The Company has completed both the Feasibility Study (FS), and the Environmental Impact Statement (EIS), and has formally submitted a Mining Lease Application (MLA) to commence construction for mining of the gold resources proven to exist on Woodlark Island, Milne Bay Province, Papua New Guinea. The Warden’s Hearing for the MLA was held on 17 January 2013. The directors are actively reviewing the various funding options to take the project to a position where it will be self- sustaining (i.e. producing and selling gold). ❋ Selling part of the Company’s interest in the project and entering into a joint venture. ❋ The government of Papua New Guinea exercising its option The continuing viability of the Company and its ability to continue as a going concern and meet its commitments as and when they fall due is dependent upon the Company being successful in either one or a combination of the following alternatives: to purchase up to 30% of the project. ❋ Pre-sales of future gold production. ❋ Undertaking further capital raising(s). After reviewing the feasibility study mining plan, it was determined that some prior period expenditure, capitalised to the statement of financial position in “Mineral exploration & evaluation expenditure” has been in areas of interest where mining will not be economic or no mining is currently planned to occur. The Group has recognised a write-off of $26,587,000 in the consolidated statement of comprehensive income for the year ended 31 December 2012. On 17 January 2013 the group lodged the Environmental Impact Statement (EIS) with the Papua New Guinea Department of Environment and Conservation (DEC). The Group is committed to developing the project in an environmentally responsible manner. On 4 February 2013 Kula Gold Limited appointed Stuart Pether as Chief Operating Officer. Mr Pether is a qualified mining engineer with an extensive career in the resources industry with the following major areas of expertise: project development, technical studies, mine operation and corporate development. This key appointment will help the group transition from explorer to producer. ❋ Debt finance. ❋ Partial sale of the project. ❋ Joint venture of the project. ❋ Equity raising. ❋ Pre-sales of future gold production. ❋ The Government of Papua New Guinea exercising its option to purchase up to 30% of the project. As a result of these matters, there is a material uncertainty that may cast significant doubt on whether the Company will continue as a going concern and therefore, whether it will realise its assets and settle its liabilities and commitments in the normal course of business and at the amounts stated in the financial report. Conclusion: The directors believe the Company has sufficient funds to settle its debts as and when they become due and payable. The Company will need to conclude one or more of the above arrangements to further its development plans. On that basis the directors have prepared the financial report on a going concern basis. At this time, the directors are of the opinion that no asset is likely to be realised for an amount less than the amount at which it is recorded in the annual financial report at 31 December 2012. Accordingly, no adjustments, other than as required due to the Company’s standard accounting policies, have been made to the financial report relating to the recoverability and classification of the asset carrying amounts or the amounts and classification of liabilities that might be necessary should the Company not continue as a going concern. 17 Annual Report 2012Directors’ report (continued) Significant changes in the state of affairs In the opinion of the directors there were no other significant changes in the state of affairs of the Group that occurred during the financial year under review not otherwise disclosed in this annual report. likely developments and expected results of operations Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this annual report because the directors believe it would be likely to result in unreasonable prejudice to the Group. environmental regulation The Group’s exploration activities in Papua New Guinea are subject to the environmental regulation of Papua New Guinea. The Group aims to ensure the appropriate standard of environmental care is achieved, and in doing so, that it is aware of and is in compliance with all environmental legislation. The directors of the Group are not aware of any breach of environmental legislation for the period under review. Information on directors David Frecker BA, llM Independent chairman and non-executive director. Age 64. experience and expertise David Frecker is a non-executive director of Kula Gold and has been elected chairman of the board. David is a commercial lawyer with over 35 years’ experience in practice in Australia and PNG. He is a partner of Ashurst Australia (formerly Blake Dawson), practising in the corporate and commercial area and specialising in mining, oil & gas and resources law, and all aspects of commercial law in PNG. Prior to joining Ashurst Australia in 1980, David worked for five years in the Mining and Major Projects section of the State Solicitor’s Office in PNG. He subsequently spent four years as one of Ashurst Australia’s resident partners in PNG. David is a member of AMPLA (the Resources and Energy Law Association of Australia) and the Resources, Energy and Environmental Law Committee of the Law Council of Australia. He is admitted to practise in Australia and PNG and holds Bachelor of Arts, Bachelor of Laws and Masters of Laws degrees from the University of Sydney. other current directorships The Kokoda Track Foundation Limited. Former directorships in last 3 years None. 18 Special responsibilities Independent chairman. Member of the audit committee. Member of the remuneration and nomination committee. Interests in shares and options ❋ 100,000 ordinary fully paid shares (balance up to the date of signing the directors’ report); ❋ 100,000 KGDOPT2 class options to acquire ordinary fully paid shares. lee Spencer MSc App (Mineral exploration) Managing director and chief executive officer. Age 59. experience and expertise Lee is a geologist with over 30 years’ experience in the mining industry. He has proven expertise in operating mines, project development and exploration and has worked in South-East Asia and PNG since 1976. Lee has been associated with the Woodlark Island gold project for over ten years. Lee has held numerous senior executive positions in the mining industry including chief executive officer of BDI Mining Corp and vice president of exploration for Indomin Resources Ltd. Lee has extensive developing country experience and has been credited with several project discoveries and developments in the region, including the Cempaka diamond mine in Indonesia. Lee holds an MSc App (Mineral Exploration) degree from the University of New South Wales. other current directorships None. Lee Spencer has been Kula Gold’s chief executive officer and managing director since July 2007. Former directorships in last 3 years None. Special responsibilities Managing director. Member of the risk committee. Interests in shares and options ❋ 579,870 ordinary fully paid shares; ❋ 1,126,155 KGDOPT1 class options to acquire ordinary fully paid shares; ❋ 1,500,000 KGDOPT5 class options to acquire ordinary fully paid shares. Kula Gold Limited ACN 126 741 259Directors’ report (continued) Information on directors (continued) John Watkins BA (Acct/Geo), Dip GeoSc (Min ec), M App Fin Executive director and chief financial officer. Age 58. louis rozman Beng (Mining), Masters in Geoscience (Min ec) Non-executive director. Age 55. experience and expertise John Watkins has been Kula Gold’s chief financial officer since January 2008. experience and expertise Louis Rozman has been a non-executive director of Kula Gold since July 2007. John is a mining industry executive with commercial and geoscience qualifications and over 30 years’ experience working in the resources sector. He was previously the commercial manager at Barrick Gold Corporation’s Porgera Gold Mine and has worked in Papua New Guinea (PNG) or on PNG projects for approximately 20 years. John has held the positions of chief financial officer, financial controller and company secretary for AMEX, ASX and TSX listed mining companies, including Endeavour Silver Corp and Nicron Resources Ltd. John is a member of the Australian Society of CPAs, FCIS, FFin and a Fellow of the Australasian Institute of Mining and Metallurgy. He has a BA (Acct/Geo) degree and a Diploma in Geoscience (Min Ec) from Macquarie University and a Master of Applied Finance from Kaplin/Finsia. other current directorships None. Former directorships in last 3 years None. Special responsibilities Executive director. Interests in shares and options ❋ 460,000 ordinary fully paid shares (balance up to the date of signing the directors’ report); ❋ 563,078 KGDOPT1 class options to acquire ordinary fully paid shares; Louis is a mining engineer and executive with 30 years’ experience operating and constructing projects in Africa, Australia and Papua New Guinea. Louis was chief operating officer of Aurion Gold Limited and was instrumental in the development of its predecessor, Delta Gold Limited. He was also chief executive officer of CH4 Gas Ltd, a successful pioneering coal bed methane developer and producer. Louis is a founding partner and director of Pacific Road Capital Management Pty Ltd. Louis is a Fellow and Chartered Professional (Management) of the Australasian Institute of Mining and Metallurgy and a Member of the Australian Institute of Company Directors. He has a Bachelor of Engineering (Mining) degree from the University of Sydney and a Masters in Geoscience (Min Ec) from Macquarie University. other current directorships Pacific Energy Ltd, Mawson West Ltd and Carbon Energy Ltd. Former directorships in last 3 years Timmins Gold Corp. Special responsibilities Non-executive director. Chairman of the risk committee. Chairman of the remuneration and nomination committee. Interests in shares and options ❋ 410,287 ordinary fully paid shares; ❋ 100,000 KGDOPT2 class options to acquire ordinary ❋ 1,500,000 KGDOPT5 class options to acquire ordinary fully paid shares. fully paid shares. 19 Annual Report 2012Directors’ report (continued) Information on directors (continued) Mark Stowell BBus, CA Independent non-executive director. Age 49. experience and expertise Mark Stowell has been a non-executive director of Kula Gold since September 2010. Mark is a chartered accountant with over 20 years of corporate finance and resource business management experience. He served as manager in the corporate division of Arthur Andersen and subsequently in the establishment and management of a number of successful ventures as principal, including resource companies operating in Australia and internationally. He was a founder of Anvil Mining Ltd (DRC) and on its board for seven years until 2000. He was also a founder and non-executive director of Incremental Petroleum Limited, an oil and gas producer with operations in Turkey and the USA. He is a non-executive director and founder of Mawson West Ltd, a Toronto Stock Exchange (TSX: MWE) listed copper miner operating in Africa, and its associated group company, Orrex Resources Ltd. Mark is also a non-executive director of Incremental Oil and Gas Ltd, (ASX: IOG) a USA oil and gas producer. Mark is a member of the Institute of Chartered Accountants and has a Bachelor of Business degree from Edith Cowan University (formerly the WA College of Advanced Education). other current directorships Mawson West Ltd, Orrex Resources Ltd, Incremental Oil and Gas Ltd. Former directorships in last 3 years Incremental Petroleum Limited. Special responsibilities Chairman of the audit committee. Member of the risk committee. Member of remuneration and nomination committee. Interests in shares and options ❋ 796,432 ordinary fully paid shares (balance up to date of signing of the directors report); ❋ 100,000 KGDOPT2 class options to acquire ordinary fully paid shares. Company secretary Mrs Leanne Ralph was appointed to the position of company secretary on 1 June 2011. Leanne is a member of the Chartered Secretaries Australia and Australian Institute of Company Directors. Leanne is the principal of Boardworx Australia Pty Ltd which supplies bespoke outsourced company secretarial services to a number of listed and unlisted companies. Meetings of directors The numbers of meetings of the Company’s board of directors and of each board committee held during the year ended 31 December 2012, and the numbers of meetings attended by each director were: 2012 Board meetings Meetings of committees Audit risk remuneration and nomination number eligible to attend number attended number eligible to attend number attended number eligible to attend number attended number eligible to attend number attended 14 14 14 14 14 14 13 14 14 12 3 – – – 3 3 – – – 3 – 1 – 1 1 – 1 – 1 – – – – – – – – – – – name D Frecker L Spencer J Watkins L Rozman M Stowell 20 Kula Gold Limited ACN 126 741 259Directors’ report (continued) remuneration report The remuneration report sets out remuneration information for Kula Gold Limited’s executive directors, non-executive directors, other key management personnel. a) Principles used to determine the nature and amount of remuneration b) Role of remuneration and nomination committee c) Details of remuneration d) Service agreements of key management personnel e) Share-based compensation f) Bonuses g) Additional information The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. a) principles used to determine the nature and amount of remuneration The objective of the Group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for shareholders, and conforms with market practice for delivery of reward. The board ensures that executive reward satisfies the following key criteria for good reward governance practices: ❋ competitiveness and reasonableness; ❋ acceptability to shareholders; ❋ performance linkage/alignment of executive compensation; ❋ transparency; and ❋ capital management. The Group has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the organisation. b) role of remuneration and nomination committee The board has established a remuneration and nomination committee which makes recommendations to the board on remuneration and incentive policies and practices and specific recommendations on remuneration packages and other terms of employment for executive directors, other senior executives and non-executive directors. The Corporate Governance Statement provides further information on the role of this committee. The role of the remuneration and nomination committee is to attend to matters relating to Kula Gold’s remuneration policy to enable Kula Gold to attract and retain executives who will create value for shareholders and to oversee remuneration packages for executive directors and senior management of Kula Gold. Remuneration surveys are reviewed by the committee from time to time to ensure the group’s remuneration system and reward practices are in line with current market practice. The committee also attends to matters relating to succession planning and recommends candidates for election or re- election to the board at each annual shareholder’s meeting. The committee will periodically assess the appropriate mix of skills, experience and expertise required on the board and assess the extent to which the required skills and experience are represented on the board. The committee comprises only non-executive directors, at least three members and a majority of independent directors. The committee will be chaired by a non-executive director who is not the Chair of the board. The current members of the remuneration and nomination committee are Louis Rozman (Chairman), Mark Stowell and David Frecker. 21 Annual Report 2012Directors’ report (continued) remuneration report (continued) non-executive directors Non-executive directors are remunerated by way of directors’ fees within the limit approved by shareholders. The board determines fees paid to individual board members. The current maximum aggregate sum which shareholders have fixed to be paid as fees to non-executive directors is $300,000 per annum. This is unchanged from prior year. This amount was fixed by shareholders at the general meeting held on 20 September 2010. The chairman is paid an annual fee of $70,000 plus superannuation. Other non-executive directors are paid annual base fees of $40,000 plus $10,000 for each chairman of a board committee, plus superannuation. Where a director acts as a chairman of more than one board committee, the maximum remuneration payable is $10,000. Short-term incentives (“StI”) The remuneration and nomination committee is responsible for assessing whether the key performance indicators are met in light of the Company’s corporate goals and objectives and arranges annually a performance evaluation of the Company’s senior executives, including the chief executive officer and the chief financial officer. The evaluation is based on specific criteria, including the business performance of the Company, whether strategic objectives are being achieved and the development of management and personnel. long-term incentives (“ltI”) Long-term incentives are provided to certain employees via the Kula Gold Limited Option Plan (Plan). The role of the Plan is detailed under the heading ‘share-based compensation’ within the remuneration report. Remuneration to non-executive directors is not paid by commission on, or percentage of, profits or operating revenue. c) Details of remuneration Amounts of remuneration Details of the remuneration of the directors and key management personnel (as defined in AASB 124 Related Party Disclosures) of the Group and Company are set out in the following tables: executive directors position L Spencer J Watkins Managing director and chief executive officer Executive director and chief financial officer non-executive directors position D Frecker L Rozman M Stowell Non-executive chairman Non-executive director Non-executive director Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the directors. Non-executive directors’ fees and payments are reviewed annually by the board. The chair’s fees are determined independently to the fees of non-executive directors based on comparative roles in the external market. The chair is not present at any discussions relating to determination of his own remuneration. executive compensation Remuneration to executives is not paid by commission on, or percentage of, profits or operating revenue. The executive compensation and reward framework has three components: ❋ Fixed compensation which includes base pay and benefits, including superannuation; ❋ Short-term performance incentives; and ❋ Long-term incentives through participation in the Kula Gold Limited Option Plan. Fixed compensation Fixed compensation consists of base compensation which is calculated on a total cost basis, as well as employer contributions to superannuation funds. 22 Kula Gold Limited ACN 126 741 259 Directors’ report (continued) remuneration report (continued) Key management personnel of the Group – 2012 2012 name Directors D Frecker L Spencer J Watkins L Rozman M Stowell Total Short-term employee benefits post-employment benefits long-term benefits Share-based payments Cash salary and fees $ Cash bonus $ Superannuation $ long service leave $ options $ percentage of total package % total $ 70,000 350,000 300,000 50,000 50,000 820,000 – 32,813 33,000 – – 65,813 6,300 13,510 15,010 – 4,500 39,320 – 6,418 5,509 – – 13,315 199,159 121,011 13,315 13,315 11,927 360,115 14.9 33.1 25.5 21.0 19.6 89,615 601,900 474,530 63,315 67,815 1,297,175 the relative proportions of remuneration that are linked to performance and those that are fixed are as follows: name Directors D Frecker L Spencer J Watkins L Rozman M Stowell Fixed remuneration 2012 % At risk short-term incentives 2012 % At risk long-term incentives 2012 % 85 62 68 79 80 – 5 7 – – 15 33 25 21 20 Key management personnel and other executives of the Group and the Company – 2011 Short-term employee benefits post-employment benefits long-term benefits Share-based payments Cash salary and fees $ Cash bonus $ Superannuation $ long service leave $ options $ percentage of total package % 2011 name Directors D Frecker L Spencer J Watkins L Rozman M Stowell P Bradford* Sub-total executives G Clapp# K Neate# total other key management personnel T Mulroney+# 392,399 – 70,000 312,500 257,500 50,000 50,000 25,000 – 34,375 53,750 – – – 1,157,399 88,125 278,039 244,251 – – 6,300 22,875 18,675 – 4,500 – – 52,350 – – – 27,361 22,525 – – – – 49,886 13,279 224,856 135,997 13,279 13,279 6,585 24,071 431,346 – – – 13,789 1,679,689 88,125 52,350 49,886 445,135 14.8 36.2 27.8 21.0 19.6 20.9 5.8 – – 5.3 – * P Bradford resigned 30 June 2011 + T Mulroney resigned 31 August 2011. All payments were made to PACT Mining Pty Ltd. # Employees of Woodlark Mining Limited. total $ 89,579 621,967 488,447 63,279 67,779 31,585 416,470 1,779,106 278,039 258,040 2,315,185 23 Annual Report 2012Directors’ report (continued) remuneration report (continued) d) Service agreements of key management personnel Compensation and other terms of employment for the managing director and the chief financial officer are formalised in service agreements. All contracts with executives may be terminated early, subject to termination payments as detailed below. l Spencer, Managing director and chief executive officer ❋ Terms of agreement: Ongoing under new terms and conditions which commenced 16 November 2010; ❋ Base salary: $350,000 plus superannuation guarantee, to be reviewed annually on 1 July each year; ❋ Performance bonus: Eligible to be paid a performance related bonus of up to 25% of the base salary which is assessed as detailed in short-term incentives; ❋ Termination benefits: i) 90 days’ notice is required on resignation; ii) Termination by the Company, three months of base salary; and if terminated within 12 months after a change of control of the Company, 18 months of base salary grossed up to include any unpaid bonus and net of all deductions required by law. J Watkins, executive director and chief financial officer ❋ Terms of agreement: Ongoing under new terms and conditions which commenced 16 November 2010; ❋ Base salary: $300,000 plus superannuation guarantee, to be reviewed annually on 1 July each year; ❋ Performance bonus: Eligible to be paid a performance related bonus of up to 25% of the base salary which is assessed as detailed in short-term incentives; ❋ Termination benefits: i) 90 days’ notice is required on resignation; ii) Termination by the Company, three months of base salary; and if terminated within 12 months after a change of control of the Company, 18 months of base salary grossed up to include any unpaid bonus and net of all deductions required by law. e) Share-based compensation options Options over shares in Kula Gold Limited are granted under the Kula Gold Limited Option Plan (Plan) to employees (including directors). The Plan is designed to provide long-term incentives for executives and senior employees to deliver long-term shareholder returns. Participation in the Plan is at the board’s discretion and no individual has a contractual right to participate in the Plan or to receive any guaranteed benefits. Options granted under the Plan carry no dividend or voting rights. Separately, at the time of the initial public offering of the Company’s shares, each of the current non-executive directors was offered options. Details of options over ordinary shares in the Company provided as remuneration to each director of Kula Gold Limited and each of the key management personnel of the Group are set out below. When exercisable, each option is convertible into one ordinary share of Kula Gold Limited. Further information on the options is set out in note 26 to the financial statements. The following options are held by directors of the Company as at 31 December 2012: name D Frecker# L Spencer** L Spencer* L Spencer** J Watkins** J Watkins* J Watkins** L Rozman# M Stowell# Granted number 100,000 1,126,155 750,000 750,000 563,078 750,000 750,000 100,000 100,000 Grant Date 01 Dec 2010 01 Dec 2010 16 Dec 2011 16 Dec 2011 01 Dec 2010 16 Dec 2011 16 Dec 2011 01 Dec 2010 01 Dec 2010 Vested number Forfeited In Year – 1,126,155 750,000 750,000 563,078 750,000 750,000 – – – – – – – – – – – expiry Date 01 Dec 2015 01 Dec 2015 16 Dec 2016 16 Dec 2016 01 Dec 2015 16 Dec 2016 16 Dec 2016 01 Dec 2015 01 Dec 2015 exercise price Fair Value at Grant Date Value at forfeiture date^ $1.80 $1.80 $2.00 $2.00 $1.80 $2.00 $2.00 $1.80 $1.80 $41,000 $349,109 $45,000 $45,000 $174,555 $45,000 $45,000 $41,000 $41,000 – – – – – – – – – ^ The value at forfeiture date of options that were granted as part of the remuneration and that lapsed during the year because a vesting condition was not satisfied. The value is determined at the time of lapsing, but assuming the condition was satisfied. 24 Kula Gold Limited ACN 126 741 259 Directors’ report (continued) remuneration report (continued) The following factors were used in determining the fair value of options on grant date: name Granted number expiry Date Fair Value per option exercise price price of Shares on Grant Date expected Volatility Interest rate D Frecker# 100,000 01 Dec 2015 L Spencer** 1,126,155 01 Dec 2015 L Spencer* 750,000 16 Dec 2016 L Spencer** 750,000 16 Dec 2016 J Watkins** J Watkins* J Watkins** L Rozman# M Stowell# 563,078 01 Dec 2015 750,000 16 Dec 2016 750,000 16 Dec 2016 $0.06 100,000 01 Dec 2015 100,000 01 Dec 2015 $0.41 $0.41 $0.41 $0.31 $0.06 $0.06 $0.31 $0.06 $1.80 $1.80 $2.00 $2.00 $1.80 $2.00 $2.00 $1.80 $1.80 $1.68 $1.68 $1.09 $1.09 $1.68 $1.09 $1.09 $1.68 $1.68 30% 30% 37% 37% 30% 37% 37% 30% 30% 5.33% 5.33% 3.24% 3.24% 5.33% 3.24% 3.24% 5.33% 5.33% Maximum total value of options yet to vest $13,278 – – – – – – $13,278 $13,278 All options carry no voting rights and no rights to dividends. * Options vested on 16 December 2011. ** Options vested on 16 November 2012. # Options granted to non-executive directors will only vest and become exercisable after either of the following events: i) the Company’s Woodlark Island gold project (Project) reaches commercial production as determined by the pour of the first gold from the Project or, ii) there is a change of control of the Company. f) Bonuses For cash bonuses the percentage of the available bonus paid in the financial year and the percentage that was forfeited because the person did not meet the performance criteria are set out below. No part of the bonus is payable in future years. name L Spencer J Watkins Bonus paid % Bonus forfeited % 38 44 62 56 g) Additional information There were no loans to directors or executives during the reporting period. No options were exercised during the year ended 31 December 2012 (2011: Nil). Shares under option Unissued ordinary shares of Kula Gold Limited under options at the date of this report are as follows: Date options granted 01 Dec 2010 16 Mar 2011 14 Apr 2011 16 Dec 2011 25 Jan 2013 expiry date 01 Dec 2015 16 Mar 2016 16 Mar 2016 16 Dec 2016 25 Jan 2016 exercise price of shares number under option $1.80 $1.80 $1.80 $2.00 $0.48 1,989,233 100,000 120,000 3,000,000 1,000,000 6,209,233 No option holder has any right under the options to participate in any other share issue of the Company or any other entity. 25 Annual Report 2012Directors’ report (continued) Indemnification and insurance of officers The Group has agreed to indemnify the directors and officers of the Group for any: i) liability for any act or omission in their performance as director or officer; and ii) costs incurred in settling or defending any claim or proceeding relating to any such liability, not being a criminal liability. During the financial year, Kula Gold paid premiums to insure the directors and the officers of the Group. In accordance with commercial practice the policy has a confidentiality clause which prohibits the disclosure of the amount of the premium and the nature and amount of the liability covered. There were no claims under the policy during the reporting period. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Group. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. proceedings on behalf of the Group No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Group, or to intervene in any proceedings to which the Group is a party, for the purpose of taking responsibility on behalf of the Group for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Group with leave of the Court under section 237 of the Corporations Act 2001. non-audit services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Group are important. Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers) for non-audit services provided during the year are set out below. The board of directors has considered the position and, in accordance with advice received from the audit committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: ❋ all non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor; and ❋ none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. employees Kula Gold Group staff members as at 31 December 2012: position Kula Gold limited Woodlark Mining limited total Directors (Executive) Directors (Non-executive) Senior executive Other Male Female Male Female Male Female 2 3 1 1 7 – – – 2 2 – – 2 97 99 – – – 19 19 2 3 3 98 106 – – – 21 21 26 Kula Gold Limited ACN 126 741 259Directors’ report (continued) non-audit services (continued) During the year the following fees were paid or payable for non-audit services provided by the auditor of the Group, its related practices and non-related audit firms: Consolidated 2012 $ 2011 $ non-audit services Other assurance services PricewaterhouseCoopers Australian firm: Other services total remuneration for other assurance services Taxation services PricewaterhouseCoopers Australian firm: Tax compliance service Other tax advice Related practices of PricewaterhouseCoopers Australian firm total remuneration for taxation services Total remuneration for non-audit services – – 8,800 – 10,154 18,954 18,954 – – 12,450 5,000 5,512 22,962 22,962 Functional and presentation currency The amounts included in the directors’ report and consolidated financial statements are presented in Australian dollars, which is the Company’s functional and presentation currency. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 28. rounding of amounts The Group is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the directors’ report. Amounts in the directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. This report is made in accordance with a resolution of directors. David Frecker Chairman Sydney, 27 March 2013 Lee Spencer Director 27 Annual Report 2012 28 Kula Gold Limited ACN 126 741 259Corporate governance statement The board is committed to ensuring that Kula Gold is properly managed to protect and enhance shareholder interests, and that Kula Gold, its directors, officers and employees operate in an appropriate environment of corporate governance. Accordingly, the board has adopted corporate governance policies and practices (the majority of which are in accordance with ASX’s Corporate Governance Principles and Recommendations (ASX Recommendations) designed to promote the responsible management and conduct of Kula Gold Limited (Company). Where the Company’s practices do not correlate with the ASX Recommendations, Kula Gold is working towards compliance but does not consider that all practices are appropriate for the size and scale of Kula Gold’s operations. The board continues to review the framework and practices to ensure they meet the interests of shareholders. The Company and its controlled entity together are referred to as the Group in this statement. A description of the Group’s main corporate governance practices is set out below. All these practices, unless otherwise stated, were in place for the entire year. role of the board The responsibilities of the board as outlined in the board charter include: ❋ overseeing the business and affairs of Kula Gold; ❋ appointing the managing director and other senior executives and determining their terms and conditions, including remuneration and termination; ❋ driving the strategic direction of Kula Gold, ensuring appropriate resources are available to meet objectives and monitoring management’s performance; ❋ reviewing and ratifying systems of risk management and internal compliance and control, codes of conduct and legal compliance; ❋ overseeing and reviewing the Company’s occupational health and safety systems; Details of Kula Gold’s key policies and charters for the board and each of its committees are available upon request to the company secretary. ❋ approving and monitoring the progress of major capital expenditure, capital management and significant acquisitions and divestitures; principle 1 – lay solid foundations for management and oversight recommendation 1.1: Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions. The board is ultimately responsible for setting policies regarding the strategic direction and goals for the business and affairs of Kula Gold. In discharging their duties, directors are provided direct access to and may rely upon senior management and outside advisers. The board collectively, the board committees and individual directors may seek independent professional advice at Kula Gold’s expense, subject to prior consultation with the Chairman, for the purposes of the proper performance of their duties. ❋ approving and monitoring the budget and the adequacy and integrity of financial and other reporting; ❋ approving the annual, half-yearly and quarterly accounts; ❋ approving significant changes to the organisational structure; ❋ approving the issue of any shares, options, equity instruments or other securities in Kula Gold; ❋ ensuring a high standard of corporate governance practice and regulatory compliance and promoting ethical and responsible decision-making; ❋ recommending to shareholders the appointment of the external auditor as and when their appointment or re-appointment is required to be approved; and ❋ meeting with external auditor, at their request, without management being present. role of senior executives The board delegates day-to-day management of Kula Gold’s resources to management, under the leadership of the chief executive officer, to deliver the strategic direction and goals determined by the board. 29 Annual Report 2012Corporate governance statement (continued) principle 1 – lay solid foundations for management and oversight (continued) recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives. Kula Gold aims to have a clear process for evaluating the performance of senior executives. The board has delegated to the remuneration and nomination committee the responsibility to arrange annually a performance evaluation of the Company’s senior executives, including the chief executive officer and the chief financial officer. The evaluation is based on specific criteria, including the business performance of the Company, whether strategic objectives are being achieved and the development of management and personnel. principle 2 – Structure the board to add value It is a policy of Kula Gold that the board comprises individuals with a range of knowledge, skills and experience which are appropriate to its objectives. The composition of the board is to be reviewed periodically to ensure the appropriate mix of skills and expertise is present to facilitate successful strategic direction. Currently the board comprises five directors, being a non- executive chairman, two executive directors and two non- executive directors. The directors have a broad mix of skills, experience and knowledge to enable them to effectively and efficiently discharge their responsibilities and duties. Details of the members of the board, their experience, expertise, qualifications and independent status are set out in the directors’ report. recommendation 2.1: A majority of the board should be independent directors. The board has adopted specific principles in relation to directors’ independence principals that are in line with those suggested in the ASX recommendation. The board considers an independent director to be a non-executive director who is not a member of Kula Gold’s management and who is free of any business or other relationship that could materially interfere with, or could reasonably be perceived to interfere with, the independent exercise of their judgement. The board will consider the materiality of any given relationship on a case-by-case basis, having regard to both quantitative and qualitative principles. The board currently comprises three non-executive directors and two executive directors. The chairman is a non-executive director. The current members of the board are D Frecker (Chairman), L Spencer (Executive director), J Watkins (Executive director), L Rozman and M Stowell (non-executive directors). D Frecker and M Stowell are considered by the board to be independent. The board considers that the existing board structure is appropriate for Kula Gold’s current operations and stage of development despite the fact that it does not have a majority of independent non-executive directors. recommendation 2.2: the Chair should be an independent director. Chairman Mr D Frecker was appointed chairman of the Company for the full financial year and is considered an independent director in accordance with recommendation 2.1 of the ASX recommendations. recommendation 2.3: the roles of Chair and chief executive officer should not be exercised by the same individual. The role of Chair and chief executive officer is not occupied by the same individual. recommendation 2.4: the board should establish a nomination committee. The board has an established remuneration and nomination committee. The remuneration and nomination committee has a written charter defining the role and responsibility of the committee. The responsibilities of the remuneration and nomination committee include matters relating to succession planning and recommend candidates for election or re- election to the board at each annual shareholders’ meeting. The committee will periodically assess the appropriate mix of skills, experience and expertise required on the board and assess the extent to which the required skills and experience are represented on the board. recommendation 2.5: Companies should disclose the process for evaluating the performance of the board, its committees and individual directors. The Company’s corporate governance plan provides for annual performance reviews of the board as a whole, the committee of the board and individual directors. There have been open communications between directors about issues of performance. However, given the size of the board and the pressures on the time of directors, a formal review process was not undertaken during 2012. 30 Kula Gold Limited ACN 126 741 259Corporate governance statement (continued) principle 3 – promote ethical and responsible decision-making recommendation 3.1: Companies should establish a code of conduct. The board acknowledges the need for high standards of corporate governance practice and ethical conduct by all directors and employees of Kula Gold. The board has adopted a code of conduct which sets out Kula Gold’s commitment to maintaining high levels of integrity and ethical standards in its business practices. The code of conduct sets out for all directors, management and employees the standards of behaviour expected of them. The code of conduct sets out Kula Gold’s policies on various matters, including, conflicts of interest, public and media comment, use of Kula Gold resources, security of information, intellectual property/copyright, discrimination and harassment, corrupt conduct, occupational health and safety and insider trading. In addition to their obligations under the Corporations Act 2001 in relation to inside information, all directors, employees and consultants have a duty of confidentiality to Kula Gold in relation to confidential information they possess. The company has a trading policy which outlines the restrictions, closed periods and processes required when directors and employees trade company securities. Broadly the policy states that directors and employees are prohibited from dealing in the company securities during closed periods. These periods are one week prior to release of the company’s quarterly, half-yearly or annual results or the release of a disclosure document offering securities in the company. However should price sensitive information, which is not available to the market, be in possession of a director or employee, they must not deal in the company’s securities. Prior to trading in the company’s securities a director must obtain the approval of the chairman. The chairman must obtain the approval of the chief executive officer (CEO) or chief financial officer (CFO). First or second line employees of the CEO must obtain the CEO approval prior to transacting in the company’s securities. All share trades must be notified to the company secretary within five business days of the transaction. recommendation 3.2: Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. the policy should include requirements for the board to establish measurable objectives for achieving gender diversity for the board to assess annually both the objectives and progress in achieving them. The board has adopted a diversity policy that outlines the Group’s commitment to equality and the treatment of all individuals with respect. The board considers that diversity within the Group refers to characteristics or factors such as religion, race, ethnicity, language, gender, sexual orientation, disability, age or any other area of potential difference. Although the Company is listed on the ASX and has its head office in Sydney, Australia, its main area of operations, through its wholly owned subsidiary Woodlark Mining Limited, is in Papua New Guinea (PNG) where it is subject to laws and government policies which may not be consistent in all respects with the recommendations of the ASX Corporate Governance Council on diversity. These PNG laws and government policies include: ❋ Restrictions through the requirements for visas and work permits on the employment of persons who are not PNG citizens. ❋ Requirements to promote the employment of PNG citizens through training and localisation; and ❋ conditions of any mining development approval that preference in employment is given, first to local people living in the project area and secondly, to people from the province in which the project is situated. Subject to the PNG aspects referred to above, the Company’s diversity policy states the Group is to do the following: ❋ Attract and retain a skilled and diverse workforce from the communities in which its operations are located. ❋ Promote and maintain a work environment that values and utilises the contributions of employees with diverse backgrounds, experience and perspectives. ❋ Take action against inappropriate workplace behaviour including discrimination, harassment, bullying, victimisation and vilification. ❋ Set measurable objectives for gender diversity that will be monitored and reviewed annually. ❋ Provide employees with opportunities to develop skills and experience for career advancement. ❋ Ensure appropriate selection criteria are used when hiring new staff, including board members, which do not contain any direct or inferred discrimination. ❋ Ensure that applicants and employees of all backgrounds are encouraged to apply for and have a fair opportunity to be considered for, all available roles. ❋ Develop flexible work practices to meet the differing needs of employees. ❋ Comply with equal opportunity and anti-discrimination legislation (where applicable). 31 Annual Report 2012Corporate governance statement (continued) principle 3 – promote ethical and responsible decision-making (continued) recommendation 3.3: Companies should disclose in each annual report the measurable objectives for achieving gender diversity set by the board in accordance with the diversity policy and progress towards achieving them. The board has adopted the following objectives for gender diversity: (1) 25% female employees across all group operations (aggregating Australia and PNG) by 31 December 2014; and (2) one female director of Kula Gold Limited by 31 December 2014. Good progress toward achieving the first objective is shown in the directors’ report under the title “Employees” (21 female employees out of a total of 127 employees). There is not currently a female director. recommendation 3.4: Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board. Set out in the directors’ report is the number of women employees in the whole organisation, senior positions and on the board. principle 4 – Safeguard integrity in financial reporting recommendation 4.1: the board should establish an audit committee. The board has an established audit committee. recommendation 4.2: the audit committee should be structured so that it: ❋ consists only of non-executive directors ❋ consists of a majority of independent directors ❋ is chaired by an independent director, who is not Chair of the board ❋ has at least three members The audit committee consists of two non-executive directors both of whom are independent directors and is chaired by an independent director who is not Chair of the board. The chairman satisfies the test of independence. The board is of the opinion the composition of the audit committee with the two independent directors is appropriate given the relatively small size of the current board. The current members of the audit committee are M Stowell (Chairman) and D Frecker. Details of these directors’ qualifications and attendance at audit committee meetings are set out in the directors’ report. recommendation 4.3: the audit committee should have a formal charter. The audit committee has a written charter defining the role and responsibility of the committee. The role of the audit committee is to assist the board in monitoring and reviewing any matters of significance affecting financial reporting and compliance. The external auditor will attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the audit report. principle 5 – Make timely and balanced disclosure recommendation 5.1: Companies should establish written policies designed to ensure compliance with ASX listing rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. Kula Gold is committed to continuous disclosure of material information as a means of promoting transparency and investor confidence. The company secretary has been nominated as the persons responsible for communications with the Australian Securities Exchange (ASX). This role includes the responsibility for ensuring compliance with the continuous disclosure requirements in the ASX listing rules and overseeing and co- ordinating information disclosure to ASX. The Company has written policies and procedures on information disclosure that focus on continuous disclosure of any information concerning the Company that a reasonable person would expect to have a material effect on the price of the Company’s securities. principle 6 – respect the rights of shareholders recommendation 6.1: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. The board aims to ensure that shareholders are informed of all major developments affecting the Company. Shareholders are updated on the Company’s operations via ASX announcements, “Quarterly Activities Reports”, “Quarterly Cash Flow Reports” and other disclosure information. All ASX announcements are available on the Company’s website at www.kulagold.com.au, or alternatively, by request via email, facsimile or post. In addition, a copy of the annual report is distributed to all shareholders who elect to receive it. 32 Kula Gold Limited ACN 126 741 259Corporate governance statement (continued) The risk committee is comprised of three members and may include both executive and non-executive directors. The committee is chaired by a non-executive director who is not the Chair of the board. The current members of the risk committee are L Rozman (Chairman), M Stowell and L Spencer. Details of these directors’ qualifications and attendance at risk committee meetings are set out in the directors’ report. recommendation 7.3: the board should disclose whether it has received assurance from the chief executive officer (Ceo or equivalent) and the chief financial officer (CFo or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act 2001 is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. Mr L Spencer (CEO) and Mr J Watkins (CFO) have made the following certifications to the board: ❋ the financial records of the Company (and the consolidated entity) have been properly maintained in accordance with Section 286 of the Corporations Act 2001; and ❋ the financial statements and notes to the financial statements of the Company and the consolidated entity comply with the relevant accounting standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and ❋ give a true and fair view of the Company’s (and consolidated entity’s) financial position and performance. principle 7 – recognise and manage risk recommendation 7.1: Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. Kula Gold has a process for the identification, monitoring and management of risks associated with its business activities and the implementation of practical and effective control systems to manage them. recommendation 7.2: the board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. the board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks. The board is responsible for ensuring that sound risk management strategy and polices are in place. The board has established a risk committee. The board has delegated to the risk committee responsibility for identifying and overseeing major risk areas and that systems are in place to manage them, and report to the board as and when appropriate. The role of the risk committee is to assist the board with the identification and management of business and operational risks faced by the Company. The committee has primary responsibility for overseeing the Company’s risk management systems, practices and procedures and reviewing periodically the scope and adequacy of the Company’s insurance to cover these risks. The risk committee has developed and maintains a risk register which identifies the risks to the Company and its operation and assesses the likelihood of their occurrence. The risk register is updated periodically and presented to the board for its consideration at least once a year. The responsibility for undertaking and assessing risk management and internal control effectiveness is delegated to management. Management is required to assess risk management and associated internal compliance and control procedures and report back to the risk committee on whether those risks are being managed effectively. 33 Annual Report 2012Corporate governance statement (continued) recommendation 8.3: Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives. Each member of the senior executive team, including the two executive directors, have signed a formal employment contract at the time of their appointment covering a range of matters including their duties, rights, responsibilities and any entitlements on termination. The standard contract refers to a specific formal job description. Each contract sets out the remuneration of the executive, including his or her entitlements to any options under the Kula Gold Limited Option Plan. Non-executive directors receive director’s fees in agreed amounts. Each of the current non-executive directors holds options on terms approved by the ASX. These are set out in the directors’ report. Further information on directors’ and executives’ remuneration, including principles used to determine remuneration, is set out in the directors’ report under the heading “remuneration report”. principle 8 – remunerate fairly and responsibly recommendation 8.1: the board should establish a remuneration committee. The board has an established remuneration and nomination committee. The remuneration and nomination committee has a written charter defining the role and responsibility of the committee. recommendation 8.2: the remuneration committee should be structured so that it: ❋ consists of a majority of independent directors ❋ is chaired by one of its members, who is not the Chair of the board ❋ has at least three members The remuneration and nomination committee consists of the following non-executive directors (a majority of whom are independent): L Rozman (Chairman), M Stowell and D Frecker. Details of these directors’ attendance at remuneration and nomination committee meetings are set out in the directors’ report. The role of the remuneration and nomination committee is to attend to matters relating to Kula Gold’s remuneration policy to enable Kula Gold to attract and retain executives who will create value for shareholders and to oversee remuneration packages for executive directors and senior management of Kula Gold. 34 Kula Gold Limited ACN 126 741 259FInAnCIAl StAteMentS CONTENTS Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report to the members of Kula Gold Limited 36 37 38 39 40 76 77 These financial statements are the consolidated financial statements of the consolidated entity consisting of Kula Gold Limited and its subsidiary. The financial statements are presented in the Australian currency. Kula Gold Limited is a company limited by shares, incorporated and domiciled in Australia. The registered and principal place of business is Suite 2, Level 15, 1 York Street, Sydney, NSW 2000. A description of the nature of the consolidated entity’s operations and its principal activities is included in the directors’ report on pages 16 to 27, which is not part of these financial statements. The financial statements were authorised for issue by the directors on 27 March 2013. The directors have the power to amend and reissue the financial statements. Annual Report 2012 35 Consolidated statement of comprehensive income For the year ended 31 December 2012 revenue from continuing operations expenses Employee benefits expense Professional and consulting expenses Rental expense Insurance expense Write-off of exploration & evaluation expenditure Foreign exchange gain Other expenses Loss before income tax Income tax benefit/(expense) Loss for the year from continuing operations Other comprehensive income Exchange differences on translation of foreign operations Total comprehensive (loss)/income for the year Loss per share for losses from continuing operations attributable to the ordinary equity holders of the company: Basic loss per share Diluted loss per share Consolidated 2012 $’000 504 (1,717) (917) (193) (100) (26,587) 64 (288) (29,234) 2011 $’000 2,032 (1,837) (1,048) (185) (96) – 51 (271) (1,354) – – (29,234) (1,354) Notes 5 6 6 7 17(a) (752) (29,986) 20,251 18,897 2012 cents (25.45) (25.45) 2011 Cents (1.20) (1.20) 25 25 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 36 Kula Gold Limited ACN 126 741 259Consolidated statement of financial position As at 31 December 2012 aSSeTS current assets Cash and cash equivalents Receivables and other assets Inventories Total current assets non-current assets Property, plant and equipment Mineral exploration and evaluation expenditure Other non-current assets Total non-current assets Total assets LiaBiLiTieS current liabilities Trade and other payables Total current liabilities non-current liabilities Provisions Total non-current liabilities Total liabilities net assets eQUiTY Contributed equity Reserves Accumulated losses Total equity Consolidated Notes 2012 $’000 2011 $’000 8 9 10 11 12 13 14 15 7,924 20,112 329 662 863 867 8,915 21,842 2,780 3,416 102,044 115,077 112 107 104,936 118,600 113,851 140,442 1,329 1,329 3,715 3,715 582 582 358 358 1,911 4,073 111,940 136,369 16 17(a) 17(b) 139,946 134,792 10,159 (38,165) 10,508 (8,931) 111,940 136,369 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 37 Annual Report 2012 Consolidated statement of changes in equity For the year ended 31 December 2012 Attributable to owners of Kula Gold limited Contributed equity $’000 Share-based payments reserve $’000 notes Foreign currency translation reserve $’000 total reserves $’000 Accumulated losses $’000 total equity $’000 Balance at 1 January 2011 134,792 (859) (9,355) (10,214) (7,577) 117,001 Loss for the year Exchange differences on translation of foreign operations 17 total comprehensive income for the year transactions with owners in their capacity as owners: Share-based payments 17 – – – – – – – – 471 471 – – (1,354) (1,354) 20,251 20,251 – 20,251 20,251 20,251 (1,354) 18,897 – – 471 471 – – 471 471 Balance at 31 December 2011 134,792 (388) 10,896 10,508 (8,931) 136,369 Balance at 1 January 2012 134,792 (388) 10,896 10,508 (8,931) 136,369 Loss for the year Exchange differences on translation of foreign operations 17 total comprehensive loss for the year – – – transactions with owners in their capacity as owners: Contributions of equity, net of transactions costs and tax Share-based payments 16 17 5,154 – 5,154 – – – – 403 403 – – (29,234) (29,234) (752) (752) – (752) (752) (752) (29,234) (29,896) – – – – 403 403 – – – 5,154 403 5,557 Balance at 31 December 2012 139,946 15 10,144 10,159 (38,165) 111,940 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 38 Kula Gold Limited ACN 126 741 259Consolidated statement of cash flows For the year ended 31 December 2012 cash flows from operating activities Payments to suppliers and employees (inclusive of goods and services tax) Interest income net cash outflow from operating activities cash flows from investing activities Payments for property, plant and equipment Payments for exploration activities net cash outflow from investing activities cash flows from financing activities Proceeds from issues of shares (net of transaction costs) net cash inflow from financing activities net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents cash and cash equivalents at end of year Consolidated 2012 $’000 2011 $’000 Notes (2,552) (2,552) 787 (1,765) (2,783) (2,783) 1,936 (847) (142) (15,428) (15,570) (1,510) (26,082) (27,592) 5,154 5,154 – – (12,181) (28,439) 20,219 (2) 8,036 48,265 393 20,219 24 11 16 8 8 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 39 Annual Report 2012noteS to tHe ConSolIDAteD FInAnCIAl StAteMentS CONTENTS 1. Summary of significant accounting policies 2. Financial risk management 3. Critical accounting estimates and judgements 4. Segment information 5. Revenue 6. Expenses 7. Income tax (benefit)/expense 8. Current assets – Cash and cash equivalents 9. Current assets – Receivables and other assets 10. Current assets – Inventories 11. Non-current assets – Property, plant and equipment 12. Non-current assets – Mineral exploration and evaluation expenditure 13. Non-current assets – Other non-current assets 14. Current liabilities – Trade and other payables 15. Non-current liabilities – Provisions 16. Contributed equity 17. Reserves and accumulated losses 18. Key management personnel disclosures 19. Remuneration of auditors 20. Contingencies 21. Commitments 22. Related party transactions 23. Subsidiary 24. Reconciliation of loss after income tax to net cash outflow from operating activities 25. Earnings per share 26. Share-based payments 27. Parent entity financial information 28. Events occurring after the reporting period 29. Significant matters relating to the ongoing viability of operations 40 Kula Gold Limited ACN 126 741 259 41 50 52 53 54 54 55 56 57 57 58 59 60 60 61 62 63 64 68 68 69 69 70 70 70 71 74 75 75 noteS to tHe ConSolIDAteD FInAnCIAl StAteMentS Notes to the consolidated financial statements For the year ended 31 December 2012 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of Kula Gold Limited and its subsidiary. a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and Corporations Act 2001. Compliance with IFrS The consolidated financial statements of the Kula Gold Limited group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Kula Gold Limited is a for-profit entity for the purposes of preparing the financial statements. Historical cost convention These financial statements have been prepared under the historical cost convention. Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. new and amended standards adopted by the group None of the new standards and amendments to standards that are mandatory for the first time for the financial year beginning 1 January 2012 affected any of the amounts recognised in the current period or any prior period and are not likely to affect future periods. However, the adoption of AASB 1054 Australian additional Disclosures and AASB 2011- 1 Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project enabled the removal of certain disclosures in relation to commitments. b) principles of consolidation i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Kula Gold Limited (“Company” or “Parent entity”) as at 31 December 2012 and the results of all subsidiaries for the year then ended. Kula Gold Limited and its subsidiaries together are referred to in this financial report as the group or the consolidated entity. Subsidiaries are all entities (including special purpose entities) over which the group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the group (refer to note 1(h)). Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of financial position respectively. 41 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 1 Summary of significant accounting policies (continued) c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors which includes the chief executive officer and the chief financial officer. d) Foreign currency translation i) Functional and presentation currency Items included in the financial statements of each of the group’s operations are measured using the currency of the primary economic environment in which it operates (”the functional currency”). The consolidated financial statements are presented in Australian dollars, which is Kula Gold Limited’s functional and presentation currency. ii) transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are included in the fair value reserve in equity. iii) Group companies The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: ❋ assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; ❋ income and expenses for each statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and ❋ all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associate exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. Goodwill and fair value adjustments arising on a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. e) revenue recognition Revenue represents interest income and is recognised using the effective interest method. f) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. 42 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 1 Summary of significant accounting policies (continued) f) Income tax (continued) h) Business combinations (continued) Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax liability is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. g) leases Leases in which a significant portion of the risks and rewards of ownership are not transferred to the group as lessee are classified as operating leases (note 21). Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease. h) Business combinations The acquisition method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred also includes the fair value of any asset or liability resulting from contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. i) Impairment of assets Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. 43 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 1 Summary of significant accounting policies (continued) j) Cash and cash equivalents For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. recognition and derecognition Regular purchases and sales of financial assets are recognised on trade-date that is the date on which the group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the group has transferred substantially all the risks and rewards of ownership. k) Inventories Raw materials and stores, work in progress and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Costs are assigned to individual items of inventory on the basis of weighted average costs. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. l) Investments and other financial assets Classification The group classifies its investments as loans and receivables. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting period which are classified as non-current assets. Loans and receivables are included in receivables and other assets (note 9) in the consolidated statement of financial position. Measurement At initial recognition, the group measures a financial asset at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Impairment The group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. For loans and receivables, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated statement of comprehensive income. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the group may measure impairment on the basis of an instrument’s fair value using an observable market price. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated statement of comprehensive income. 44 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 1 Summary of significant accounting policies (continued) m) property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. n) exploration and evaluation expenditure (continued) Exploration and evaluation expenditure is written-off when it fails to meet at least one of the conditions outlined above or an area of interest is abandoned. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the reducing balance method to allocate their cost, net of their residual values, over their estimated useful lives as follows: Buildings Motor vehicles and boats Plant and equipment Furniture and fittings 25 years 3 years 6 years 6 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(i)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the consolidated statement of comprehensive income. n) exploration and evaluation expenditure Exploration and evaluation costs related to an area of interest are expensed as incurred except where they may be carried forward as an item in the consolidated statement of financial position where the rights of tenure of an area are current and one of the following conditions is met: i) the costs are expected to be recouped through successful development and exploitation of the area of interest, or alternatively, by its sale; or ii) exploration and/or evaluation activities in the area of interest have not at the reporting date reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest is continuing. Exploration and evaluation assets are assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. When facts and circumstances suggest that the carrying amount exceeds the recoverable amount, the impairment loss will be measured in accordance with the group’s impairment policy (note 1 (i)). o) trade and other payables These amounts represent liabilities for goods and services provided to the group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. p) provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. 45 Annual Report 2012 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 1 Summary of significant accounting policies (continued) q) provision for decommissioning costs A provision is recognised for the future decommissioning and restoration of mining operations at the end of their economic lives. The timing of recognition requires the application of judgement to existing facts and circumstances, which will be subject to changes. Estimates of the amounts of provision are based on current legal and constructive requirements, technology and price levels. Because the actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take place many years in the future, the carrying amount of the provision is regularly reviewed and adjusted to take account of such changes. r) employee benefits i) Short-term obligations Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in other payables and accruals together with other employee benefit obligations. ii) other long-term employee benefit obligations The liability for long service leave and annual leave which is not expected to be settled within 12 months after the end of the period in which the employee renders the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. The obligations are presented as current liabilities in the balance sheet if the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. iii) Share-based payments Share-based compensation benefits are provided to employees via the Kula Gold Limited Option Plan (Plan). Information relating to the Plan is set out in note 26. The fair value of options granted under the Plan is recognised as an employee benefit expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options granted, which includes any market performance conditions and the impact of any non-vesting conditions, but excludes the impact of any service and non-market performance vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of options that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. s) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. t) Goods and Services tax (GSt) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. u) rounding of amounts The group is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. 46 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 1 Summary of significant accounting policies (continued) v) earnings per share i) Basic earnings per share Basic earnings per share are calculated by dividing: ❋ the profit attributable to owners of the company, excluding any costs of servicing equity other than ordinary shares; and ❋ by the weighted average number of ordinary shares outstanding during the financial year. ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: ❋ the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and ❋ the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. w) parent entity financial information The financial information for the parent entity, Kula Gold Limited, disclosed in note 27 has been prepared on the same basis as the consolidated financial statements, except as set out below. i) Investments in subsidiaries Investments in subsidiaries are accounted for at cost in the financial statements of Kula Gold Limited. ii) Financial guarantees Where the parent entity has provided financial guarantees in relation to loans and payables of subsidiaries for no compensation, the fair values of these guarantees are accounted for as contributions and recognised as part of the cost of the investment. iii) Share-based payments The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the group is charged to the subsidiary’s loan account. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to mineral exploration and evaluation expenditure in the statement of financial position (until the Company moves into the mining phase). x) new accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2012 reporting periods. The group’s assessment of the impact of these new standards and interpretations is set out below. i) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 , AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) and AASB 2012-6 Amendments to Australian Accounting Standards – Mandatory effective Date of AASB 9 and transition Disclosures (effective for annual reporting periods beginning on or after 1 January 2015) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2015 but is available for early adoption. The standard is not expected to have any impact on the group’s accounting for financial assets when adopted as all financial assets are currently measured at amortised cost and will continue to be under AASB 9. There will be no impact on the group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated as at fair value through profit or loss and the group does not have any such liabilities. The derecognition rules have been transferred from AASB 139 Financial Instruments: Recognition and Measurement and have not been changed. The group has not yet decided when to adopt AASB 9. ii) AASB 1053 Application of tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards arising from reduced Disclosure requirements (effective 1 July 2013) On 30 June 2010 the AASB officially introduced a revised differential reporting framework in Australia. Under this framework, a two-tier differential reporting regime applies to all entities that prepare general purpose financial statements. Kula Gold Limited is listed on the ASX and is therefore not eligible to adopt the new Australian Accounting Standards – Reduced Disclosure Requirements. As a consequence, the two standards will have no impact on the financial statements of the entity. 47 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 1 Summary of significant accounting policies (continued) x) new accounting standards and interpretations (continued) iii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in other entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures, AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards and AASB 2012-10 Amendments to Australian Accounting Standards – transition guidance and other Amendments (effective 1 January 2013) In August 2011, the AASB issued a suite of five new and amended standards which address the accounting for joint arrangements, consolidated financial statements and associated disclosures. AASB 10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 12 Consolidation – Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. However the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns before control is present. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. There is also new guidance on participating and protective rights and on agent/principal relationships. The Group currently has one wholly-owed subsidiary and therefore this standard is not expected to have any impact on the group. AASB 11 introduces a principles based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. Based on the assessment of rights and obligations, a joint arrangement will be classified as either a joint operation or joint venture. Joint ventures are accounted for using the equity method, and the choice to proportionately consolidate will no longer be permitted. Parties to a joint operation will account their share of revenues, expenses, assets and liabilities in much the same way as under the previous standard. AASB 11 also provides guidance for parties that participate in joint arrangements but do not share joint control. As the group is not party to any joint arrangements, this standard will not have any impact on its financial statements. AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 128. Application of this standard by the group will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the group’s investments. AASB 127 is renamed Separate Financial Statements and is now a standard dealing solely with separate financial statements. Application of this standard by the group and parent entity will not affect any of the amounts recognised in the financial statements. 48 Kula Gold Limited ACN 126 741 259 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 1 Summary of significant accounting policies (continued) x) new accounting standards and interpretations (continued) iv) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The group does not use fair value measurements extensively. It is therefore unlikely that the new rules will have a significant impact on any of the amounts recognised in the financial statements. However, application of the new standard may impact the type of information disclosed in the notes to the financial statements. The group will adopt the new standard from its operative date, which means that it will be applied in the annual reporting period ending 31 December 2013. v) revised AASB 119 employee Benefits, AASB 2011- 10 Amendments to Australian Accounting Standards arising from AASB 119 (September 2011) and AASB 2011-11 Amendments to AASB 119 (September 2011) arising from reduced Disclosure requirements (effective 1 January 2013) In September 2011, the AASB released a revised standard on accounting for employee benefits. It requires the recognition of all remeasurements of defined benefit liabilities/assets immediately in other comprehensive income (removal of the so-called ‘corridor’ method) and the calculation of a net interest expense or income by applying the discount rate to the net defined benefit liability or asset. This replaces the expected return on plan assets that is currently included in profit or loss. The standard also introduces a number of additional disclosures for defined benefit liabilities/assets and could affect the timing of the recognition of termination benefits. The amendments will have to be implemented retrospectively. Since Kula Gold Limited does not have any defined benefit obligations, the amendments will not have any impact on the group’s financial statements. The Group will adopt the new standard when it becomes operative, being from 1 January 2013. vi) AASB 2011-4 Amendments to Australian Accounting Standards to remove Individual Key Management personnel Disclosure requirements (effective 1 July 2013) In July 2011 the AASB decided to remove the individual key management personnel (KMP) disclosure requirements from AASB 124 Related Party Disclosures, to achieve consistency with the international equivalent standard and remove a duplication of the requirements with the Corporations Act 2001. While this will reduce the disclosures that are currently required in the notes to the financial statements, it will not affect any of the amounts recognised in the financial statements. The amendments apply from 1 July 2013 and cannot be adopted early. The Corporations Act 2001 requirements in relation to remuneration reports will remain unchanged for now, but these requirements are currently subject to review and may also be revised in the near future. vii) AASB 2012-5 Amendments to Australian Accounting Standard arising from Annual Improvements 2009-2011 cycle (effective for annual periods beginning on or after 1 January 2013) In June 2012, the AASB approved a number of amendments to Australian Accounting Standards as a result of the 2009- 2011 annual improvements project. The group will apply the amendments from 1 January 2013. The group does not expect that any adjustments will be necessary as the result of applying the revised rules. viii) Investment entities (Amendments to IFrS 10, IFrS 12 and IAS 27) (effective 1 January 2014) In October 2012, the IASB made amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements which exempt investment entities from consolidating controlled investees. Kula Gold Limited does not have any controlled investees and will therefore not be affected by these amendments. There are no other standards that are not yet effective and that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. 49 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 2 Financial risk Management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange risks. Liquidity risk is managed by budgets to structure maturity dates of investments to meet anticipated outgoings of expenditure. Risk management is carried out under policies approved by the board of directors. a) Market risk i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Papua New Guinea kina (PGK) and the United States dollar (USD). Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. It is not the Group’s present policy to hedge foreign exchange risk. The Company’s functional currency is Australian dollars (AUD). The Group’s Papua New Guinea subsidiary has a functional currency of Papua New Guinea kina. The Group’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: Consolidated 2012 pGk a$’000 2012 USD a$’000 2011 PGK A$’000 2011 USD A$’000 243 (35) 208 128 (13) 115 525 (640) (115) 283 – 283 Cash Payables Net exposure Foreign currency sensitivity analysis The Group is exposed to movements in United States dollars and Papua New Guinea Kina. The following table details the Group’s sensitivity to a 10% increase and a 10% decrease in the Australian dollar against the relevant currencies: Consolidated 2012 $’000 2011 $’000 impact on post-tax loss AUD increase against foreign currencies AUD decrease against foreign currencies (29) 36 (15) 18 ii) Interest rate risk The Group’s main interest rate risk arises from cash and cash equivalents. The Group does not have any borrowings from external counterparties. Group sensitivity At 31 December 2012, the Group’s exposure to interest rates is not deemed to be material to its primary activities and the interest is generally fixed. 50 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 2 Financial risk Management (continued) b) Credit risk Credit risk arises from cash and cash equivalents as well as credit exposures in respect of outstanding receivables. The Group has no significant concentrations of credit risk. Cash deposits are held with two major Australian Banks, Westpac Banking Corporation (Westpac) and Commonwealth Bank of Australia (CBA). These banks currently hold the following long-term credit ratings: rating Agency Fitch Ratings Moody’s Investors Service Standard & Poor’s Westpac CBA AA- Aa2 AA- AA- Aa2 AA- c) liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through timing of rollover dates on its term deposits currently held by the Group. This ensures the best balance between highest interest rates available and funding requirements. The Group does not have any borrowing facilities in place at the reporting date. Maturities of financial liabilities The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Contractual maturities of financial liabilities less than 6 months $’000 6-12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 over 5 years $’000 1,329 1,329 3,715 3,715 – – – – – – – – – – – – – – – – total contractual cash flows $’000 Carrying Amount liabilities $’000 1,329 1,329 1,329 1,329 3,715 3,715 3,715 3,715 at 31 December 2012 Trade and other payables total non-derivatives At 31 December 2011 Trade and other payables total non-derivatives d) Fair value measurements The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The carrying value less impairment provision of receivables and payables are assumed to approximate their fair values due to their short-term nature. 51 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 3 Critical Accounting estimates and Judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. Sensitivity If the post-tax discount rate in the NPV calculation was 14% (instead of 7% as used in the base case model), the NPV would equal the carrying amount of deferred exploration and evaluation expenditure of $102,044,000. If the gold increased / decreased by $200/ounce from that used in the base case model (from $1,600/ounce down to $1,400 or up to US$1,800/ounce) the post-tax NPV would be US$110,000,000 and $274,000,000, respectively. A reasonable possible change in any of the other assumptions would not cause the carrying amount of the mineral exploration and evaluation to exceed the NPV of the project cash flows. Carried forward mineral exploration and evaluation expenditures are disclosed in Note 12. ii) Functional currency The Group’s transactions and balances are denominated in three main currencies (Australian dollars, Papua New Guinea kina and United States dollars). Operating costs are denominated in Australian dollars, Papua New Guinea Kina and United States dollars, however, primarily in Australian dollars. As the indicators are mixed, management has applied its judgement in accordance with the Group accounting policy on foreign currency translation (note 1(d)) and has chosen the Australian dollar as the functional currency for the parent entity and Papua New Guinea kina as the functional currency for the subsidiary. The presentation currency is in Australian dollars. The Group makes judgements, estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. i) Mineral exploration and evaluation expenditure Certain exploration and evaluation expenditure is capitalised where it is considered likely that the expenditure will be recovered by future exploitation or sale, or where activities have not reached a stage which permits a reasonable assessment of the existence of commercially recoverable reserves. This process necessarily requires management to make certain estimates and assumptions as to future events and circumstances, in particular, whether economically viable extraction operations can be established. Any such estimates and assumptions may change as new information becomes available. If, after having capitalised expenditure under this policy it is concluded unlikely that the expenditure will be recovered by future exploitation or sale, the relevant amount capitalised is written off to profit or loss. During the year the group completed a feasability study on the Woodlark Island Gold Project which concluded that a viable gold project exists. The net present value (NPV) of the estimated project cash flows in the feasibility study provides a base case outcome of US$194,000,000. The key assumptions used in the base case forecast were as follows: ❋ Recovery of 674,000 ounces over the first six years through a 1.8 Mtpa plant. ❋ Estimated operating costs of US$730/ounce for years 1 to 6. ❋ Establishment capital cost of US$160 million. ❋ Gold price of US$1,600 per ounce. ❋ Post-tax discount rate of 7%. 52 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 4 Segment information During the year the Group operated predominantly in one business segment, being gold mining exploration. Geographically, the Group operates exclusively in two geographical segments being Papua New Guinea and an office maintained in Australia. Segment accounting policies are the same as the Group’s policies described in Note 1. Segment results are classified in accordance with the location of the business activity within geographic segments: 2012 revenue Interest income Management fees Total segment revenue results Australia $’000 papua new Guinea $’000 eliminations $’000 total $’000 414 2,126 2,540 90 – 90 – (2,126) (2,126) 504 – 504 Operating loss before income tax (27,098) (26,945) 24,809 (29,234) Income tax expense – – – – Net loss after tax included within segment results (27,098) (26,945) 24,809 (29,234) Depreciation and amortisation of segment assets Write-off of mineral exploration and evaluation expenditure 22 – – 26,587 – – Write-off of investment in Woodlark Mining Limited 26,587 – (26,587) 22 26,587 – Segment assets Segment liabilities 2011 revenue Interest income Management Fees Total segment revenue results Operating profit/(loss) before income tax Income tax expense Net profit/(loss) after tax included within segment results Depreciation and amortisation of segment assets 109,378 468 116,104 3,307 (111,631) 113,851 (1,864) 1,911 2,015 2,120 4,135 806 – 806 34 17 – 17 1,090 – 1,090 – – (2,120) (2,120) 2,032 – 2,032 (3,250) (1,354) – – (3,250) (1,354) – 34 Segment assets Segment liabilities 134,280 3,829 127,957 3,665 (121,795) 140,442 (3,421) 4,073 The total of non-current assets located in Australia is $130,095,000 (2011: $114,257,000) and Papua New Guinea $104,773,000 (2011: $122,716,000). Segment assets are allocated to countries where the assets are located. 53 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 5 revenue revenue from continuing operations Interest income 6 expenses Consolidated 2012 $’000 2011 $’000 504 504 2,032 2,032 Consolidated 2012 $’000 2011 $’000 loss before income tax includes the following specific expenses Depreciation Buildings Plant and equipment Furniture and fittings Motor vehicle and boats Less: Capitalised to mineral exploration and evaluation expenditure Total depreciation Amortisation Exploration licence Less: Capitalised to mineral exploration and evaluation expenditure Total amortisation total depreciation and amortisation rental expense relating to operating leases Minimum lease payments options issued under Kula Gold limited option plan Less: Capitalised to mineral exploration and evaluation expenditure employee option expense 33 494 34 207 (746) 22 8 (8) – 22 193 403 (38) 365 Write-off of mineral exploration and evaluation expenditure (note 12) 26,587 29 361 43 279 (678) 34 – – – 34 185 471 (60) 411 – 54 Kula Gold Limited ACN 126 741 259 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 7 Income tax (benefit)/expense a) Income tax expense Current tax Deferred tax Deferred income tax (revenue) expense included in income tax expense comprises: (Increase)/decrease in deferred tax assets Consolidated 2012 $’000 2011 $’000 – – – – – – – – – – b) numerical reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense Tax at the Australian tax rate of 30% (2011: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: (29,234) (8,770) (1,354) (406) Share-based payments Impairment of capitalised exploration & evaluation expenditure Management fees (elimination) Unrealised foreign exchange variances Sundry items Prior year losses utilised Allowable capital expenditure (Papua New Guinea) Income tax benefit (loss) not recognised total income tax expense c) tax losses Australian unused tax losses for which no deferred tax asset has been recognised potential tax benefit at the Australian tax rate of 30% (2011: 30%) Benefits for tax losses will only be obtained if: i) the consolidated entity derives future Australian assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the losses to be realised; the consolidated entity continues to comply with the conditions for deductibility imposed by tax legislation; and ii) iii) no changes in tax legislation adversely affect the consolidated entity in realising the benefit from the deductions for the losses. d) unrecognised temporary differences Temporary differences for which deferred tax asset has not been recognised due to there being no virtual certainty of the Group being profitable: Employee provision Capital raising costs Accruals Sundry items 110 7,976 638 (7) 87 – (66) 32 – 152 46 119 91 139 (1) 348 123 – 636 1 73 (403) (24) – – 45 14 131 – 40 (8) 163 55 Annual Report 2012 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 7 Income tax (benefit)/expense (continued) Consolidated 2012 $’000 2011 $’000 e) tax on exploration expenditure in Woodlark Mining limited (papua new Guinea) Exploration expenditure for which no deferred tax asset has been recognised potential tax benefit at the papua new Guinea tax rate of 30% (2011: 30%) 102,044 30,613 115,077 34,523 The exploration expenditure incurred in the 20 years prior to the issue of a mining lease (“ML”) or special mining lease (“SML”) within the area of an exploration licence (“EL”) from which a ML or SML is drawn becomes part of the allowable exploration expenditure of that ML or SML in accordance with the Papua New Guinea income tax laws. Allowable exploration expenditure forms part of the allowable deductions of a mining operation. Exploration companies do not incur tax losses in Papua New Guinea. Rather, they accumulate their exploration expenditure until such time as 20 years has passed since the expenditure was incurred, the EL is abandoned, or a ML or SML is withdrawn from the area covered by the EL. During the period of the exploration a company does not claim deductions for depreciation, rather the cost of otherwise depreciable assets acquired forms part of the exploration expenditure. In this way, future deductions may be claimed for the cost of such assets by way of claiming deductions for the Allowable Exploration Expenditure. No deferred tax asset has been recognised in relation to this expenditure on the basis that realisation of the tax benefit from the allowable exploration expenditure cannot be regarded as recoverable at this stage in the life of the project. 8 Current assets – Cash and cash equivalents Cash at bank and in hand Short-term deposits* reconciliation to consolidated statement of cash flows For the purposes of the consolidated statement of cash flows, cash and cash equivalents comprise the following: Cash at bank and in hand Short-term deposits* Non-current assets – deposits (Note 13) Consolidated 2012 $’000 601 7,323 7,924 601 7,323 112 8,036 2011 $’000 1,813 18,299 20,112 1,813 18,299 107 20,219 * Short-term deposits are made for varying periods of between one day and three months, depending on the cash requirements of the Group, and earn interest at the respective short-term deposit rates. a) risk exposure The Group’s exposure to interest rate risk is discussed in note 2. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of cash and cash equivalents mentioned above. 56 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 9 Current assets – receivables and other assets Goods & services tax receivable Prepayment and other receivables a) Impaired receivables There were no impaired receivables for the Group. b) past due but not impaired There were no receivables past due for the Group. Consolidated 2012 $’000 61 268 329 2011 $’000 38 825 863 c) Foreign exchange and interest rate risk Information about the Group’s exposure to foreign currency risk and interest rate risk in relation to receivables is provided in note 2. d) Fair value and credit risk Due to the short-term nature of these receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. 10 Current assets – Inventories Inventory: Consumables Consolidated 2012 $’000 662 662 2011 $’000 867 867 57 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 11 non-current assets – property, plant and equipment At 1 January 2011 Cost Accumulated depreciation Net book amount Year ended 31 December 2011 Opening net book amount Additions Depreciation charge Exchange differences Closing net book amount At 31 December 2011 Cost Accumulated depreciation net book amount Year ended 31 December 2012 Opening net book amount Additions Depreciation charge Exchange differences Closing net book amount At 31 December 2012 Cost Accumulated depreciation net book amount Consolidated Buildings $’000 plant and equipment $’000 Furniture and fittings $’000 Motor vehicles and boats $’000 593 (61) 532 532 90 (29) 127 720 820 (100) 720 720 29 (33) (2) 714 847 (133) 714 1,780 (481) 1,299 1,299 921 (361) 251 2,110 3,171 (1,061) 2,110 2,110 82 (494) (6) 1,692 3,244 (1,552) 1,692 158 (46) 112 112 40 (43) 7 116 209 (93) 116 116 15 (34) – 97 874 (659) 215 215 459 (279) 75 470 1,459 (989) 470 470 16 (207) (2) 277 223 (126) 97 1,470 (1,193) 277 total $’000 3,405 (1,247) 2,158 2,158 1,510 (712) 460 3,416 5,659 (2,243) 3,416 3,416 142 (768) (10) 2,780 5,784 (3,004) 2,780 Total depreciation charge for the year is $768,000 (2011: $712,000) of which $747,000 (2011: $678,000) has been capitalised under exploration and evaluation expenditure (note 12) in accordance with the Group’s accounting policy. 58 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 12 non-current assets – Mineral exploration and evaluation expenditure Consolidated exploration licences $’000 Deferred exploration expenditure $’000 At 1 January 2011 Cost Accumulated amortisation Net book amount Year ended 31 December 2011 Opening net book amount Exchange differences Additions Amortisation charge Closing net book amount At 31 December 2011 Cost Accumulated amortisation net book amount Year ended 31 December 2012 Opening net book amount Exchange differences Additions Amortisation charge Write-off of exploration and evaluation expenditure* Closing net book amount At 31 December 2012 Cost Accumulated amortisation and write-off net book amount 9,526 (9,519) 7 7 1 – – 8 9,527 (9,519) 8 8 – – (8) – – 9,527 (9,527) – total $’000 77,912 (9,519) 68,393 68,393 18,058 28,626 – 68,386 – 68,386 68,386 18,057 28,626 – 115,069 115,077 115,069 – 115,069 115,069 (364) 13,926 – (26,587) 102,044 128,631 (26,587) 102,044 124,596 (9,519) 115,077 115,077 (364) 13,926 (8) (26,587) 102,044 138,158 (36,114) 102,044 *The Feasibility Study (see directors report – review of operations) is now completed and the areas where mining is planned have been determined. At this time the previously capitalised mineral exploration and evaluation expenditure incurred in areas of interest where mining is not presently anticipated in the mine plan have been written off through the statement of comprehensive income. This is in line with the Group’s accounting policy for this type of expenditure. The recoverability of the carrying amount of the mineral exploration and evaluation assets is dependent on successful development and commercial exploitation, or alternatively, sale of the respective areas of interest. 59 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 13 non-current assets – other non-current assets Deposits 14 Current liabilities – trade and other payables Trade payables Other payables and accruals a) Amounts not expected to be settled within the next 12 months Other payables include accruals for annual leave. The entire obligation is presented as current, since the Group does not have an unconditional right to defer settlement. However, based on past experience, the Group does not expect all employees to take the full amount of accrued leave within the next 12 months. The following amounts reflect leave that is not expected to be taken within the next 12 months: Annual leave obligation expected to be settled after 12 months b) risk exposure Information about the Group’s exposure to foreign exchange risk is provided in note 2. Consolidated 2012 $’000 112 112 2011 $’000 107 107 Consolidated 2012 $’000 180 1,149 1,329 2011 $’000 3,160 555 3,715 119 119 119 119 60 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 15 non-current liabilities – provisions Provision for long service leave Provision for demobilisation Provision for rehabilitation Consolidated 2012 $’000 137 250 195 582 2011 $’000 162 – 196 358 a) Movements in provisions Movements in each class of provision during the financial year, other than provision for long service leave, are set out below: Carrying amount at the start of the year – 1 January 2012 – additional provisions recognised – exchange differences Carrying amount at the end of the year – 31 December 2012 Consolidated provision for demobilisation $’000 provision for rehabilitation $’000 – 250 – 250 196 – (1) 195 total $’000 196 250 (1) 445 61 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 16 Contributed equity a) Share capital Ordinary shares b) Movements in share capital parent entity parent entity 2012 Shares 2011 Shares 2012 $’000 2011 $’000 126,253,023 112,615,523 139,946 134,792 Date Details 1 January 2011 Opening balance 31 December 2011 Balance 9 November 2012 Share placement (tranche 1) 30 November 2012 Share placement (tranche 2) 3 December 2012 Share placement (tranche 2) 4 December 2012 Share purchase plan 31 December 2012 Transaction costs on share placement 31 December 2012 Balance number of shares 112,615,523 112,615,523 6,987,500 1,094,782 4,417,718 1,137,500 – 126,253,023 Issue price $ – 0.40 0.40 0.40 0.40 – total $’000 134,792 134,792 2,795 438 1,767 455 (301) 139,946 c) ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to, one vote, and upon a poll each share is entitled to one vote. d) options Information relating to the options issued, exercised and lapsed during the financial year and options outstanding at the end of the financial year, is set out in note 26. e) Share buy-back There is no current on-market buy-back f) Capital risk management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the directors may decide to restrict dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to provide additional cash resources. 62 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 17 reserves and accumulated losses a) reserves Share-based payments reserve Foreign currency translation reserve Movements: Share-based payments reserve Balance 1 January Option expense Balance 31 December Foreign currency translation reserve Balance 1 January Currency translation differences arising during the year Balance 31 December b) Accumulated losses Balance 1 January Net loss for the year Balance 31 December c) nature and purpose of reserves Consolidated 2012 $’000 15 10,144 10,159 (388) 403 15 10,896 (752) 10,144 (8,931) (29,234) (38,165) 2011 $’000 (388) 10,896 10,508 (859) 471 (388) (9,355) 20,251 10,896 (7,577) (1,354) (8,931) i) Share-based payments reserve The share-based payments reserve is used to recognise the grant date fair value of options issued to employees but not exercised. ii) Foreign currency translation reserve Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income as described in note 1(d) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. 63 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 18 Key management personnel disclosures a) Key management personnel The names of persons who were key management personnel of Kula Gold Limited at any time during the financial year are as follows: i) Chairman non-executive D Frecker ii) executive directors L Spencer, Managing director and chief executive officer J Watkins, Executive director and chief financial officer iii) non-executive directors L Rozman M Stowell b) Key management personnel compensation Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Consolidated 2012 $ 2011 $ 885,813 1,245,524 39,320 11,927 360,115 52,350 49,886 431,346 1,297,175 1,779,106 Detailed remuneration disclosures are provided in the remuneration report on pages 21 to 25. c) equity instrument disclosures relating to key management personnel i) options provided as remuneration Details of options over ordinary shares in the Company provided as remuneration to key management personnel of Kula Gold Limited group during the period ended 31 December 2012 and 2011 are set out below. When exercisable, each option is convertible into one ordinary share of Kula Gold Limited. Further information on the options is set out in note 26. ii) option holdings No options were granted as remuneration to key management personnel of the Group during the year ended 31 December 2012. 64 Kula Gold Limited ACN 126 741 259 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 18 Key management personnel disclosures (continued) c) equity instrument disclosures relating to key management personnel (continued) The following options were granted as remuneration to key management personnel of the Group during the year ended 31 December 2011: name L Spencer* L Spencer** J Watkins* J Watkins** T Mulroney** Granted number 750,000 750,000 750,000 750,000 300,000 Grant Date 16 Dec 2011 16 Dec 2011 16 Dec 2011 16 Dec 2011 13 Jan 2011 Vested number 750,000 750,000 750,000 750,000 Forfeited number – – – – expiry Date 16 Dec 2016 16 Dec 2016 16 Dec 2016 16 Dec 2016 – (300,000) 13 Jan 2016 exercise price Fair Value at Grant Date $2.00 $2.00 $2.00 $2.00 $1.80 $45,000 $45,000 $45,000 $45,000 $96,000 * Options vested on 16 December 2011. ** Options vested on 16 November 2012. The following factors were used in determining the fair value of options on grant date: name L Spencer* L Spencer** J Watkins* J Watkins** T Mulroney** Granted number 750,000 750,000 750,000 750,000 300,000 expiry Date 16 Dec 2016 16 Dec 2016 16 Dec 2016 16 Dec 2016 13 Jan 2016 * Options vested on 16 December 2011. ** Options vested on 16 November 2012. Fair Value per option exercise price price of Shares on Grant Date expected Volatility Interest rate $0.06 $0.06 $0.06 $0.06 $0.32 $2.00 $2.00 $2.00 $2.00 $1.80 $1.09 $1.09 $1.09 $1.09 $1.70 37% 37% 37% 37% 30% 3.24% 3.24% 3.24% 3.24% 5.28% These options carry no voting rights and no rights to dividends. The assessed fair value at grant date of options granted to key management personnel is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. Fair values at grant date are determined using a Black-Scholes option pricing model that takes into account the exercise price, the expected life of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the expected life of the option. The expected volatility reflects the assumption that the current volatility during the time of issue is indicative of further trends, which may not necessarily be the actual outcome. The expected life of the options has been determined as two years based upon the expected date of the Papua New Guinea Mineral Resources Authority issuing a mining licence for the Woodlark Island gold project. iii) Shares provided on exercise of remuneration options No options were exercised during the period ended 31 December 2012 (2011: Nil). 65 Annual Report 2012 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 18 Key management personnel disclosures (continued) c) equity instrument disclosures relating to key management personnel (continued) iv) option holdings The numbers of options over ordinary shares in the Company held during the financial year by each director of Kula Gold Limited and other key management personnel of the Group, including their personally related parties, are set out below. 2012 – Options name Balance at start of the year Granted as compensation exercised Balance at end of the year Vested and exercisable unvested Directors of Kula Gold limited D Frecker L Spencer J Watkins L Rozman M Stowell 100,000 2,626,155 2,063,078 100,000 100,000 – – – – – – – – – – 100,000 2,626,155 2,063,078 100,000 100,000 – 100,000 2,626,155 2,063,078 – – – – 100,000 100,000 All vested options are exercisable. 2011 – Options name Balance at start of the year Granted as compensation exercised other changes* Balance at end of the year Vested and exercisable unvested Directors of Kula Gold limited D Frecker L Spencer J Watkins L Rozman M Stowell Former director P Bradford 100,000 – 1,126,155 1,500,000 563,078 100,000 100,000 100,000 1,500,000 – – – other key management personnel T Mulroney (resigned 31 August 2011) – 300,000 * Other changes represent options cancelled during the period. All vested options are exercisable. – – – – – – – – – – – – (100,000) (300,000) 100,000 – 100,000 2,626,155 750,000 1,876,155 2,063,078 750,000 1,313,078 100,000 100,000 – – – – – – 100,000 100,000 – – 66 Kula Gold Limited ACN 126 741 259 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 18 Key management personnel disclosures (continued) c) equity instrument disclosures relating to key management personnel (continued) v) Share holdings The numbers of shares in the Company held during the financial year by key management personnel of Kula Gold Limited group, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation. 2012 – Ordinary shares name Balance at the start of the year Granted during reporting year as compensation received during the year on the exercise of options other changes during the year* Balance at the end of the year Directors of Kula Gold limited D Frecker L Spencer J Watkins L Rozman M Stowell 10,000 542,370 290,000 359,023 25,000 – – – – – – – – – – 47,500 37,500 170,000 51,264 337,500 57,500 579,870 460,000 410,287 362,500 * All directors participated in Share Placement Plan and have purchased 37,500 shares each. All other changes represent shares purchased on market. 2011 – Ordinary shares name Balance at the start of the year Granted during reporting year as compensation received during the year on the exercise of options other changes during the year* Balance at the end of the year Directors of Kula Gold limited D Frecker L Spencer J Watkins L Rozman M Stowell Former directors P Bradford (resigned 30 June 2011) 10,000 542,370 275,600 359,023 25,000 432,900 – – – – – – * Other changes for J Watkins represent shares purchased on market. – – – – – – – – 14,400 – – – 10,000 542,370 290,000 359,023 25,000 432,900 d) loans and other transactions with key management personnel There were no loans made to key management personnel during the reporting period (2011: $nil). Other transactions with key management personnel are disclosed in note 22. 67 Annual Report 2012 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 19 remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: a) pricewaterhouseCoopers Australia Audit and other assurance services Statutory audit and review of financial statements Total remuneration for audit and other assurance services taxation services Tax compliance services Other tax advice Total remuneration for taxation services Consolidated 2012 $’000 2011 $’000 100,000 100,000 8,800 – 8,800 120,000 120,000 12,450 5,000 17,450 Total remuneration of PricewaterhouseCoopers Australia 108,800 137,450 b) network firms of pricewaterhouseCoopers Australia Audit and other assurance services Statutory audit and review of financial statements Total remuneration of audit and other assurance services taxation services Tax compliance services Total remuneration for taxation services Total remuneration of related practices of PricewaterhouseCoopers Australia 20 Contingencies The Group had no contingent assets or liabilities at 31 December 2012 (2011: $nil). 45,790 45,790 10,154 10,154 55,944 49,834 49,834 5,512 5,512 55,346 68 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 21 Commitments a) lease commitments Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years The Group leases office space and a warehouse under non-cancellable operating leases. On renewal, the terms of the lease are renegotiated. The Group does not have an option to purchase the leased asset at the expiry of the lease period. b) Service commitments Commitments for minimum service payments in relation to drilling services, air charter, barge charter and aerial survey are payable as follows: Consolidated 2012 $’000 2011 $’000 159 491 – 650 – – 193 654 – 847 47 47 22 related party transactions a) Subsidiaries Details of the interest in the subsidiary are set out in note 23. b) Key management personnel compensation Details of key management personnel remuneration are disclosed in note 18 and the remuneration report section of the directors’ report. c) transactions with other related parties The following transactions occurred with related parties during the year ending 31 December 2012: ❋ Pacific Road Capital Management Pty Ltd was paid for services of L Rozman as a director of the parent entity $50,000. ❋ Fees paid to Ashurst Australia $97,004 and Ashurst Papua New Guinea $11,705 for general legal advice. D Frecker, a director of the company is a non-equity partner of Ashurst. The following transactions occurred with related parties during the year ending 31 December 2011: ❋ Consulting fees paid to Goldkidz Pty Ltd for services of P Bradford as a director of the parent entity $25,000. ❋ Pacific Road Capital Management Pty Ltd was paid for services of L Rozman as a director of the parent entity $50,000. ❋ Fees paid to Pacific Road Capital Management Pty Ltd for facilitation of the 2010 share capital raisings $121,018. ❋ Fees paid to Ashurst Australia (formerly Blake Dawson) for general legal advice $12,425. D Frecker, a director of the company is a non-equity partner of Ashurst. ❋ Consulting fees paid to PACT Mining Pty Ltd for the services of T Mulroney $392,399. 69 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 23 Subsidiary The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiary in accordance with the accounting policy described in note 1(b): name of entity Country of incorporation Class of shares equity holding Woodlark Mining Limited Papua New Guinea Ordinary 2012 % 100 2011 % 100 24 reconciliation of loss after income tax to net cash outflow from operating activities Loss for the year Depreciation and amortisation Non-cash employee benefits expense – share-based payments Net exchange differences Write-off of exploration & evaluation expenditure Change in operating assets and liabilities: (Increase) decrease in receivables (Decrease) increase in trade and other payables net cash inflow (outflow) from operating activities 25 earnings per share a) Basic loss per share From continuing operations attributable to the ordinary equity holders of the company Consolidated 2012 $’000 (29,234) 22 365 (76) 26,587 301 270 (1,765) 2011 $’000 (1,354) 34 411 (14) – 174 (98) (847) Consolidated 2012 cents 2011 Cents (25.45) (1.20) b) Diluted loss per share From continuing operations attributable to the ordinary equity holders of the company (25.45) (1.20) c) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic loss per share Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted loss per share 114,888,440 112,615,523 114,888,440 112,615,523 d) Information concerning the classification of securities options Options granted to employees under the Kula Gold Limited Option Plan and to non-executive directors are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The options have not been included in the determination of basic earnings per share. Details relating to the options are set out in note 26. 70 Kula Gold Limited ACN 126 741 259 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 26 Share-based payments a) i) employee option plan The Kula Gold Limited Option Plan (Plan) is designed to provide long-term incentives for executives (including executive directors) and senior employees to deliver long-term shareholder returns. Participation in the Plan is at the board’s discretion and no individual has a contractual right to participate in the Plan or to receive any guaranteed benefits. Options were granted under the Plan for no consideration. Options granted under the Plan carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share. The exercise price of options is based on market value. Set out below are summaries of options granted under the Plan: 2012 There were no options granted under the Plan during the year ended 31 December 2012. 2011 name L Spencer L Spencer J Watkins J Watkins T Mulroney Other employees Other employees Total Grant date expiry date Issue price Assessed fair value at date of grant number of options granted 16 Dec 2011 16 Dec 2016 16 Dec 2011 16 Dec 2016 16 Dec 2011 16 Dec 2016 16 Dec 2011 16 Dec 2016 13 Jan 2011 13 Jan 2016 16 Mar 2011 16 Mar 2016 14 Apr 2011 16 Mar 2016 $0.06 $0.06 $0.06 $0.06 $0.32 $0.29 $0.43 $45,000 $45,000 $45,000 $45,000 $96,000 $58,000 $51,600 750,000 750,000 750,000 750,000 300,000 200,000 120,000 $385,600 3,620,000 ii) options for non-executive directors Pursuant to the decision of the board on 29 September 2010 a total of 400,000 options were granted to Kula Gold non-executive directors. On 30 June 2011 a non-executive director (P Bradford) resigned from the board and 100,000 options were forfeited. Options were granted for no consideration. Options carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share. The exercise price of options is based on market value. The options will only vest and become exercisable after either of the following events: i) the Company’s Woodlark Island gold project (Project) reaches commercial production as determined by the pour of the first gold from the Project or, ii) there is a change of control of the Company. No options have been granted to non-executive directors during the years ended 31 December 2012 or 2011. 71 Annual Report 2012Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 26 Share-based payments (continued) b) options granted under the plan 2012 Grant Date expiry date exercise price Balance at start of the year Granted during the year exercised during the year Forfeited during the year Balance at end of the year exercisable at end of the year number number number number number number 01 Dec 2010 16 Mar 2011 14 Apr 2011 16 Dec 2011 Total Weighted average exercise price 2011 01 Dec 2015 16 Mar 2016 16 Mar 2016 16 Dec 2016 $1.80 $1.80 $1.80 $2.00 1,989,233 100,000 120,000 3,000,000 5,209,233 $1.80 – – – – – – – – – – – – – – – 1,989,233 1,689,233 100,000 120,000 100,000 120,000 3,000,000 3,000,000 5,209,233 4,909,233 $1.92 Grant Date expiry date exercise price Balance at start of the year Granted during the year exercised during the year Cancelled during the year Balance at end of the year exercisable at end of the year number number number number number number 01 Dec 2010 13 Jan 2011 16 Mar 2011 14 Apr 2011 16 Dec 2011 Total Weighted average exercise price 01 Dec 2015 13 Jan 2016 16 Mar 2016 16 Mar 2016 16 Dec 2016 $1.80 $1.80 $1.80 $1.80 $2.00 2,089,233 – – – – – 300,000 200,000 120,000 3,000,000 2,089,233 3,620,000 – – – – – – (100,000) 1,989,233 (300,000) (100,000) – – – 100,000 120,000 3,000,000 1,500,000 (500,000) 5,209,233 1,500,000 – – – – $1.80 $1.97 $1.92 No options expired during the periods covered by the tables above. The weighted average remaining contractual life of share options outstanding at the end of the period was 3.5 years (2011: 4.5 years). Fair value of options granted The assessed fair value at grant date of options granted to key management personnel is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. Fair values at grant date are determined using a Black-Scholes option pricing model that takes into account the exercise price, the expected life of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the expected life of the option. The expected volatility reflects the assumption that the current volatility during the time of issue is indicative of further trends, which may not necessarily be the actual outcome. The expected life of the options has been determined as two years based upon the expected date of the Papua New Guinea Mineral Resources Authority issuing a mining licence for the Woodlark Island gold project. Where options are issued to employees of subsidiaries within the Group, the subsidiaries compensate Kula Gold Limited for the amount recognised as expense in relation to these options. 72 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 26 Share-based payments (continued) b) options granted under the plan (continued) The following factors were used in determining the fair value of options granted during the year ended 31 December 2011: Granted number expiry Date Fair Value per option exercise price price of Shares on Grant Date expected Volatility Interest rate 750,000 16 Dec 2016 750,000 16 Dec 2016 750,000 16 Dec 2016 750,000 16 Dec 2016 300,000 13 Jan 2016 200,000 16 Mar 2016 120,000 16 Mar 2016 $0.06 $0.06 $0.06 $0.06 $0.32 $0.29 $0.43 $2.00 $2.00 $2.00 $2.00 $1.80 $1.80 $1.80 $1.09 $1.09 $1.09 $1.09 $1.70 $1.65 $1.86 37% 37% 37% 37% 30% 30% 30% 3.24% 3.24% 3.24% 3.24% 5.28% 5.10% 5.36% name L Spencer* L Spencer** J Watkins* J Watkins** T Mulroney** Other employees** Other employees** * Options vested on 16 December 2011. ** Options vested on 16 November 2012. Options were granted for no consideration and vest based on terms detailed in the Kula Gold Limited Option Plan. Options vested on 16 November 2012 except for the options granted to Lee Spencer and John Watkins which vested on 16 December 2011. c) expenses arising from share-based payment transactions Options issued under Kula Gold Limited Option Plan consolidated 2012 $’000 403 403 2011 $’000 471 471 73 Annual Report 2012 Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 27 parent entity financial information a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets total assets Current liabilities total liabilities net Assets Shareholders’ equity Contributed equity Share-based payment reserve Accumulated losses total shareholders’ equity (loss)/profit for the year total comprehensive(loss)/ profit parent entity 2012 $’000 2011 $’000 5,870 20,023 109,378 134,280 392 468 3,771 3,829 108,910 130,451 139,946 134,792 15 (31,051) 108,910 (27,098) (27,098) (388) (3,953) 130,451 806 806 b) Guarantees entered into by the parent entity The parent entity has provided an unconditional bank guarantee to the lessor of Suite 2, Level 15, 1 York Street, Sydney in respect of a lease agreement which amounts to $112,486 (2011: $107,286). c) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 31 December 2012 (31 December 2011: $nil). d) Contractual commitments for the acquisition of property, plant or equipment The parent entity had no contractual commitments for the acquisition of property, plant and equipment as at 31 December 2012 (31 December 2011: $nil). 74 Kula Gold Limited ACN 126 741 259Notes to the consolidated financial statements (continued) For the year ended 31 December 2012 28 events occurring after the reporting period a) On 17 January 2013, the Group lodged the Environmental Impact Statement with the Papua New Guinea Development of Environment and Conservation. This completes all the initial lodgement requirements in the process of applying for a mining lease. b) On 25 January 2013, Kula Gold Limited’s board approved the issue of 1,000,000 unlisted options in favour of Stuart Pether (Chief Operating Officer) pursuant to the terms of the Kula Gold Option Plan. The options issued have an exercise price of $0.48, vest at the date of issue (25 January 2013) and have a term of three years from grant date (25 January 2016). The fair value at grant date calculated by using a Black-Scholes option pricing model is $50,000 (or $0.05 per option). 29 Significant matters relating to the ongoing viability of operations The Company has completed both the Feasibility Study (FS), and the Environmental Impact Statement (EIS), and has formally submitted a Mining Lease Application (MLA) to commence construction for mining of the gold resources proven to exist on Woodlark Island, Milne Bay Province, Papua New Guinea. The Warden’s Hearing for the MLA was held on 17 January 2013. The directors are actively reviewing the various funding options to take the project to a position where it will be self-sustaining (i.e. producing and selling gold). The continuing viability of the Company and its ability to continue as a going concern and meet its commitments as and when they fall due is dependent upon the Company being successful in either one or a combination of the following alternatives: ❋ Debt finance. ❋ Partial sale of the project. ❋ Joint venture of the project. ❋ Equity raising. ❋ Pre-sales of future gold production. ❋ The Government of Papua New Guinea exercising its option to purchase up to 30% of the project. As a result of these matters, there is a material uncertainty that may cast significant doubt on whether the Company will continue as a going concern and therefore, whether it will realise its assets and settle its liabilities and commitments in the normal course of business and at the amounts stated in the financial report. Conclusion: The directors believe the Company has sufficient funds to settle its debts as and when they become due and payable. The Company will need to conclude one or more of the above arrangements to further its development plans. On that basis the directors have prepared the financial report on a going concern basis. At this time, the directors are of the opinion that no asset is likely to be realised for an amount less than the amount at which it is recorded in the annual financial report at 31 December 2012. Accordingly, no adjustments, other than as required due to the Company’s standard accounting policies, have been made to the financial report relating to the recoverability and classification of the asset carrying amounts or the amounts and classification of liabilities that might be necessary should the Company not continue as a going concern. 75 Annual Report 2012Director’s declaration For the year ended 31 December 2012 In the directors’ opinion: a) the financial statements and notes set out on pages 36 to 75 are in accordance with the Corporations Act 2001, including: i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and ii) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2012 and its performance for the financial year ended on that date, and b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. David Frecker Chairman Sydney 27 March 2013 Lee Spencer Director 76 Kula Gold Limited ACN 126 741 259 77 Annual Report 2012PricewaterhouseCoopers,ABN52780433757DarlingParkTower2,201SussexStreet,GPOBOX2650,SYDNEYNSW1171DX77Sydney,AustraliaT+61282660000,F+61282669999,www.pwc.com.auLiabilitylimitedbyaschemeapprovedunderProfessionalStandardsLegislationIndependentauditor’sreporttothemembersofKulaGoldLimitedReportonthefinancialreportWehaveauditedtheaccompanyingfinancialreportofKulaGoldLimited(thecompany),whichcomprisestheconsolidatedstatementoffinancialpositionasat31December2012,theconsolidatedstatementofcomprehensiveincome,consolidatedstatementofchangesinequityandconsolidatedstatementofcashflowsfortheyearendedonthatdate,asummaryofsignificantaccountingpolicies,otherexplanatorynotesandthedirectors’declarationfortheKulaGoldLimitedgroup(theconsolidatedentity).Theconsolidatedentitycomprisesthecompanyandtheentitiesitcontrolledattheyear'sendorfromtimetotimeduringthefinancialyear.Directors’responsibilityforthefinancialreportThedirectorsofthecompanydisclosingentityareresponsibleforthepreparationofthefinancialreportthatgivesatrueandfairviewinaccordancewithAustralianAccountingStandardsandtheCorporationsAct2001andforsuchinternalcontrolasthedirectorsdetermineisnecessarytoenablethepreparationofthefinancialreportthatisfreefrommaterialmisstatement,whetherduetofraudorerror.InNote1,thedirectorsalsostate,inaccordancewithAccountingStandardAASB101PresentationofFinancialStatements,thatthefinancialstatementscomplywithInternationalFinancialReportingStandards.Auditor’sresponsibilityOurresponsibilityistoexpressanopiniononthefinancialreportbasedonouraudit.WeconductedourauditinaccordancewithAustralianAuditingStandards.TheseAuditingStandardsrequirethatwecomplywithrelevantethicalrequirementsrelatingtoauditengagementsandplanandperformtheaudittoobtainreasonableassurancewhetherthefinancialreportisfreefrommaterialmisstatement.Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthefinancialreport.Theproceduresselecteddependontheauditor’sjudgement,includingtheassessmentoftherisksofmaterialmisstatementofthefinancialreport,whetherduetofraudorerror.Inmakingthoseriskassessments,theauditorconsidersinternalcontrolrelevanttotheentity’spreparationandfairpresentationofthefinancialreportinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheentity’sinternalcontrol.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimatesmadebythedirectors,aswellasevaluatingtheoverallpresentationofthefinancialreport.OurproceduresincludereadingtheotherinformationintheAnnualReporttodeterminewhetheritcontainsanymaterialinconsistencieswiththefinancialreport.Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforourauditopinions.IndependenceInconductingouraudit,wehavecompliedwiththeindependencerequirementsoftheCorporationsAct2001.WeconfirmthattheindependencedeclarationrequiredbytheCorporationsAct2001,providedtothedirectorsofKulaGoldLimitedon27March2013,wouldbeinthesametermsifprovidedtothedirectorsasatthedateofthisauditor’sreport.78 Kula Gold Limited ACN 126 741 259Auditor’sopinionInouropinion:(a)thefinancialreportofKulaGoldLimitedisinaccordancewiththeCorporationsAct2001,including:(i)givingatrueandfairviewoftheconsolidatedentity’sfinancialpositionasat31December2012andofitsperformancefortheyearendedonthatdate;and(ii)complyingwithAustralianAccountingStandards(includingtheAustralianAccountingInterpretations)andtheCorporationsRegulations2001;and(b)thefinancialreportandnotesalsocomplywithInternationalFinancialReportingStandardsasdisclosedinNote1.MaterialuncertaintyregardingcontinuationasagoingconcernWithoutqualifyingouropinion,wedrawattentiontoNote29“Significantmattersrelatingtotheongoingviabilityofoperations”inthefinancialreportwhichindicatesthatthecontinuingviabilityoftheconsolidatedentityanditsabilitytocontinueasagoingconcernandmeetitsdebtsandcommitmentsasandwhentheyfalldueisdependentupontheconsolidatedentitybeingsuccessfulinraisingadditionalfunds.Theseconditions,alongwithothermattersassetforthinNote29“Significantmattersrelatingtotheongoingviabilityofoperations”,indicatetheexistenceofamaterialuncertaintyrelatedtoeventsorconditionswhichmaycastsignificantdoubtabouttheconsolidatedentity'sabilitytocontinueasagoingconcernand,therefore,theconsolidatedentitymaybeunabletorealiseitsassetsanddischargeitsliabilitiesinthenormalcourseofbusinessandattheamountsstatedinthefinancialreport.ReportontheRemunerationReportWehaveauditedtheremunerationreportincludedinpages21to25ofthedirectors’reportfortheyearended31December2012.Thedirectorsofthecompanyareresponsibleforthepreparationandpresentationoftheremunerationreportinaccordancewithsection300AoftheCorporationsAct2001.Ourresponsibilityistoexpressanopinionontheremunerationreport,basedonourauditconductedinaccordancewithAustralianAuditingStandards.Auditor’sopinionInouropinion,theremunerationreportofKulaGoldLimitedfortheyearended31December2012,complieswithsection300AoftheCorporationsAct2001.PricewaterhouseCoopersPeterBuchholzSydneyPartner28March2013Shareholder information For the year ended 31 December 2012 Additional information required by the Australian Securities Exchange Limited and not shown elsewhere in the report is as follows: The shareholder information set out below was applicable as at 19 March 2013. ordinary share capital As at 19 March 2013, the issued capital comprised of 126,253,023 ordinary fully paid quoted shares. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: Holding 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,000 and over ordinary shares options number of Holders number of shares number of Holders number of options 60 132 94 181 50 517 36,328 384,061 764,443 6,092,364 118,975,827 126,253,023 – – – 6 3 9 – – – 520,000 5,689,233 6,209,233 There were no holders of less than a marketable parcel of ordinary shares. unquoted options The Company had the following unquoted options on issue: a) employee option plan There are 5,909,233 unquoted options on issue, held by 6 employees or contractors. b) other unlisted options option holder DC Frecker & JM Frecker ATF The GEO Superannuation Fund Pacific Road Capital Management Holdings Pty Ltd Merchant Holdings Pty Ltd ATF The Zulu Family Trust number of options percentage 100,000 100,000 100,000 300,000 33.33 33.33 33.33 100.00 79 Annual Report 2012Shareholder information (continued) For the year ended 31 December 2012 twenty largest holders of quoted equity securities no. Shareholder ordinary shares number held percentage of quoted shares Pacific Road Holdings NV RMB Resources Limited National Nominees Limited JP Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited Pacific Road Capital B Pty Ltd Pacific Road Capital A Pty Ltd Zero Nominees Pty Ltd UBS Nominees Pty Ltd Fancourt Links Pty Ltd Warbont Nominees Pty Ltd AMP Life Limited BNP Paribas Nominees Pty Ltd Escor Investments Pty Ltd Mr Stanislaw Antoni Zychewicz Mr Godfrey Norman Mantle & Mrs Jennifer Deborah Mantle Houghton Waterville Pty Ltd Lee Keith Spencer & Ani Susilo Spencer Merchant Holdings Pty Ltd Buttonwood Nominees Pty Ltd JDW Investments Australia Pty Ltd 43,574,379 16,663,253 16,331,317 6,256,674 5,741,956 5,398,327 5,398,327 2,900,000 1,207,275 1,055,366 991,374 971,967 918,715 800,000 705,000 695,593 690,000 579,870 533,932 500,000 460,000 34.51% 13.20% 12.94% 4.96% 4.55% 4.28% 4.28% 2.30% 0.96% 0.84% 0.79% 0.77% 0.73% 0.63% 0.56% 0.55% 0.55% 0.46% 0.42% 0.40% 0.36% 112,373,325 89.01% 1 2 3 4 5 6 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 80 Kula Gold Limited ACN 126 741 259Shareholder information (continued) For the year ended 31 December 2012 Substantial holders Substantial holders in the company are set out below: name of substantial shareholder number of shares held percentage of issued shares Pacific Road Holdings NV RMB Resource Limited National Nominees Limited JP Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited 54,371,033 16,663,253 16,331,317 6,256,674 5,741,956 99,364,233 43.07% 13.20% 12.94% 4.96% 4.55% 78.70% Voting rights The voting rights attaching to each class of equity securities are set out below: (a) ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. (b) options No voting rights. Interest in Mining Tenements Current interest in tenements held by Kula Gold Limited and its subsidiaries as at 19 March 2013 are listed below: Country / location Papua New Guinea / Woodlark Island Papua New Guinea / Woodlark Island Papua New Guinea / Woodlark Island tenement Interest EL 1172 EL 1279 EL 1465 100% 100% 100% 81 Annual Report 2012Forward looking statements All statements other than statements of historical fact included in this report including, without limitation, statements regarding future plans and objectives of Kula Gold Limited (Kula Gold) are forward-looking statements. When used in this report, forward-looking statements can be identified by words such as ‘may’, ‘could’, ‘believes’, ‘estimates’, ‘targets’, ‘expects’ or ‘intends’ and other similar words that involve risks and uncertainties. These statements are based on an assessment of present economic and operating conditions, and on a number of assumptions regarding future events and actions that, as at the date of this report, are expected to take place. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties, assumptions and other important factors, many of which are beyond the control of the company, its directors and management of Kula Gold that could cause Kula Gold’s actual results to differ materially from the results expressed or anticipated in these statements. The company cannot and does not give any assurance that the results, performance or achievements expressed or implied by the forward-looking statements contained in this report will actually occur and investors are cautioned not to place undue reliance on these forward-looking statements. Kula Gold does not undertake to update or revise forward-looking statements, or to publish prospective financial information in the future, regardless of whether new information, future events or any other factors affect the information contained in this report, except where required by applicable law and stock exchange listing requirements. Competent persons statements The information in this report that relates to Exploration Results is based on information compiled by Lee Spencer. Lee Spencer is the chief executive officer of Kula Gold Limited. Mr Spencer is a Member of the Australasian Institute of Mining and Metallurgy and has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Mr Spencer consents to the inclusion in the report of these matters based on information in the form and context in which it appears. The information in this report that relates to the Mineral Resource estimates for Kulumadau, Busai and Boniavat is based on information compiled by Mr John Doepel, Principal Geologist for Continental Resource Management Pty Limited (CRM) (Resource Report, Woodlark Island). CRM has acted as independent consulting geologist to Woodlark Mining Limited since 2005 and has undertaken several visits to the island and to the sample preparation facilities. Mr Doepel is a Member of The Australasian Institute of Mining and Metallurgy and has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Mr Doepel consents to the inclusion in this report of these matters based on information in the form and context in which it appears. The information in this report that relates to Ore Reserves based on information compiled by Mr Linton Putland, Principal of LJ Putland & Associates and a consultant to Woodlark Mining Limited. Mr Putland is a Member of The Australasian Institute of Mining and Metallurgy and has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity for which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Mr Putland consents to the inclusion in this report of these matters based on information in the form and context in which it appears. 82 Kula Gold Limited ACN 126 741 259 This page has been left intentionally blank. Annual Report 2012 83 This page has been left intentionally blank. 84 Kula Gold Limited ACN 126 741 259 This page has been left intentionally blank. KulA GolD lIMIteD Suite 2, Level 15 1 York Street Sydney NSW 2000 t: +61 2 9262 5651 F: +61 2 9262 5680 www.kulagold.com.au 86 Kula Gold Limited ACN 126 741 259

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